<p>As far as grandparents are concerned, care needs to be taken when money is given away, should the grandparent require nursing home care to be covered by Medicaid within 5 years.</p>
<p>Grandparents need to be very careful with giving money to grandchildren like this. Just like parents need to consider retirement savings, grandparents need to consider potential nursing needs.</p>
<p>Vball, please see Section 529(c)(5)(B) - if the transfer is to a person of the same generation as the original beneficiary and of the same family as the original beneficiary, then the transfer from one benefiticy to the other is not subject to GST.</p>
<p>I’ve always thought of the 529 plan as a long term savings option, best suited to families with a decent income. Below a certain level it makes more sense for the parents to be putting money in their retirement accounts. Grandparents would need to be even more financially sound before locking up funds in a college account for a grandchild I’d think…</p>
<p>On the other hand, if a family member can loan money to the kid and may be willing and able to forgive the loan in the future, that is a much better option than the kid going too deep into debt with private loans and the relative as cosigner. I think there will be a growing need for families to find creative ways to fill in FA gaps - perhaps for all four years or maybe only to “get to the finish line” as real aid falls far short of meeting need.</p>
<p>Yes. I’ve unfortunately had this misconception that extended family can help fill the gap, but it’s tricky avoiding untaxed income to the student. You ask the kid to come up with $X the first year, s/he does via extended family, and then it becomes $X+(higher EFC)+(TCOA increase). A constantly moving target.</p>
<p>Once the money is in a 529 plan, it’s sort of trapped. Any disbursements have to go for qualified expenses, otherwise taxes and penalties apply. There will be a documented link from the 529 to the student and school. In spite of what anyone thinks might be common sense, that has to be reported as untaxed income to the student. It would be better to have the money treated as a parental asset.</p>
<p>It seems there are two basic options:</p>
<p>1 - Loan money to the student, and possibly forgive the loan later.</p>
<p>2 - Funnel everything through the (custodial) parent.</p>
<p>Well, you may be called upon to prove it, so paperwork signed and possibly notarized should be done. It’s a small price to pay. I would even suggest writing in some interest. With a verbal agreement only, there is nothing about the arrangement that is outwardly different than a gift.</p>
<p>Paying the school directly would seem to be a bad idea. Looks too much like a gift or a bill paid on the child’s behalf. If you have paperwork saying it’s a loan to the child, then they should probably write a check to the child.</p>
<p>I thought I understood that any amount of tuition paid directly to a school on behalf of a student is exempt from gift tax. Please correct me if I’m wrong. </p>
<p>Can school FA offices be relied on to answer these questions correctly or does one need to consult a CPA, attorney or the IRS? Assuming the latter can be relied upon to answer correctly on all occasions.</p>
<p>Tuition paid by anyone directly to a college is exempt from the annual $13,000 tax-free gift allowance. Has anyone stated otherwise here (maybe I missed it)?</p>
<p>The main issue that gifts of tuition paid by extended family are reported as untaxed income to the student on FAFSA, which has the potential to raise EFC. Any student income over the $5250 student income protection allowance is assessed at the rate of 50% and added to the family’s EFC.</p>
<p>I read somewhere that <em>some</em> colleges do look at payments made by someone other than the parent(s) or student, and in the subsequent year’s FA award they will add that amount as a “student resource” … I guess assuming the student can expect to receive it each year.</p>
<p>Unless getting around the gift tax is an issue, I would suggest not having grandma (or whoever) send the money directly to the school. Of course, you could ask the school how they would treat such a payment, and if they would not count it as a student resource for subsequent years, then I guess it would be fine.</p>
<p>I think the easiest thing is to just give money to the parents (or custodial parent) and skip all the loan business. Loans without standard interest rates, or where interest isn’t collected, get all sloppy with the gift tax too. </p>
<p>On the other hand, gift tax isn’t really an issue anyway unless you’re dealing with a potentially sizable estate… in which case we’re probably not talking about FA kids.</p>
so I’ll try here.</p>