Background: Our older daughter is entering 11th grade and our younger daughter is entering 8th grade. Their grandparents have set up 529 plans for each girl with considerable amounts in them. Our girls are likely to be applying mostly to CSS PROFILE colleges. As I understand it, this means that while money in these accounts would not be treated as a family asset for financial aid purposes, any withdrawals would be treated as current student income and hence subject to a 50 percent financial aid “tax.” If ownership of the accounts were transferred to my wife, they would instead be treated as parental assets and all funds in the accounts would be “taxed” at a rate of 5 percent each year, but disbursements from them would not be treated as income. As the accounts were drawn down over time, the remaining balance subject to this “tax” would decline, so my estimate is that cumulative financial aid for the two girls would ultimately be reduced by 15-20 percent of the total amount of the original funds in the accounts, rather than up to 50 percent if all of the funds were disbursed from accounts owned by the grandparents. In practice, it is likely that they would not qualify for need-based aid at all if their grandparents retain ownership of the accounts, but will likely qualify for some if ownership of the accounts is transferred.
My first question is this: has anyone reading this been in this situation and explored such a transfer of 529 plan accounts from grandparents to parents? Did it work out, and/or what hurdles did you encounter?
Also, since the funds for each girl are in a separate account, it seems like it might be even more advantageous to transfer the first account the year before our older girl starts college, and to hold off on transferring the second account until our younger girl is ready to go. On the other hand, even if this would not violate any rules, I can imagine that the older girl’s college financial aid office might raise questions if a significant new asset appears in our reporting ahead of her fourth year of college when we had not reported it before. Has anyone been in this situation and/or know from other sources if this is likely to be a problem?
P.S. I do realize that we are fortunate to have these “problems” but would still welcome any guidance,
Any money in the account has already been gifted, as far as the tax code is concerned. Changing ownership from a grandparent to a parent (if this is even allowed) does not mean that the money is gifted a second time.
I believe that the FAFSA assessment of student income is 20%, not 50%. But my guess is that your kids won’t be eligible for Pell grants, and in that case FAFSA is largely irrelevant for you. Schools that use Profile have their own formulas for determining EFC, so who knows how distributions from a grandparent-owned 529 will be factored in when determining institutional need based aid at any particular school.
The same thing above about how Profile schools treat “income” from a grandparent-owned 529 applies to how they treat parent-owned 529 accounts as an asset.
Some 529 plans allow a transfer of account ownership, and some do not. You need to look at the plan disclosures or call the plan administrator and ask. I’m sure that people have done this before. As long as you crunch the numbers, understand the ramifications, and the plan allows an ownership transfer, it shouldn’t be a problem.
“Significant new assets” happen all the time. Think inheritance, life insurance benefit, new spouse, etc. The FA office may be curious, and even ask for an explanation, but as long as you are following the rules there shouldn’t be a problem.
Final thought: with the FAFSA and Profile change to prior-prior year income reporting starting with academic year 2017-2018, it’s now easier to receive help from outside sources (like distributions from a grandparent-owned 529 plan) and have it not impact need-based financial aid. If you can afford to wait until spring of the student’s sophomore year to use money from the grandparent-owned 529, none of that money will ever show up on a financial aid form (assuming the student takes the normal four academic years to graduate). Example: your older daughter will be a college sophomore in academic year 2019-2020. Her senior year (2021-2022) financial aid forms will be completed using income data from tax year 2019. Any income received after December 31, 2019 will not appear on a financial aid form.
Thanks for your detailed reply. I had only just learned about the switch to prior-prior year reporting for FAFSA yesterday, and did not know that it applied to PROFILE as well. I do have a related question, however–don’t schools–or at least some of them–ask about anticipated resources as well as prior income? I think I have seen some posts referring to such questions. In this case, wouldn’t we be obliged to report our expected use of 529 plan funds?
I think it is one of the extra questions schools can add to the profile - we did see a question about other assets held by family members such as grandparents for the student’s education on a Profile form.
I understand wanting to plan and use the money wisely, such as not transferring the money for the younger child until it is needed (as the third child in my family, I wouldn’t want ‘my’ money used for my older siblings), but if the money is there for college, the money is there for college. That’s the purpose of the 529. The grandparents want the money to be used for an education.
Do you have this reversed? If the grandparents retain ownership of the accounts, there are fewer assets available to the child/family which would mean more need, and increases financial aid eligibility.
You are right to be thinking of this now. Of course, it can be maddening since you are trying to plan now, but you don’t (can’t) have all the needed information yet, like what is the COA and how is the FA formula determined for the school(s) involved.
Are you expecting the 529 plans to cover all or most of the costs? How have the 529 investments performed? For us, we did not have a huge amount in the 529 plans as they went in when the market was high, then the market dropped, and then recovered, so that the account had low earnings, mostly just principle. We were advised to redeem them and take the small tax hit, which we did, because it allowed us to pay down other debt, to reduce our assets and increase our need.
@twoinanddone - I agree that the grandparents want the money to be used for education, but the grandparents also want the family to have to spend as little as possible, and to maximize financial aid their grandkids will qualify for. These are not mutually exclusive - and depending on the amounts involved, sometimes it makes sense to withdraw very little from them for the first year and a half of school, to effectively use the 529’s to pay at the back-end, to maximize the student qualifying for financial aid.
My thinking is that if substantial amounts of money are paid out of the 529 plans while they are held by the grandparents and this is counted as student income, the girls are likely not to qualify for aid in later years. Whether this would affect their aid during the first or second year would depend on whether the school also asks about anticipated aid from grandparents and takes it into account; I have assumed that they would but may be mistaken about that.
I should probably also clarify that my in-laws have set aside significantly more money than we are likely to need for each girl to pay for the last two years of college, so that if we waited until after their 4th-semester bills had been paid to start using the money in order to avoid reporting the payments, we would wind up leaving some unused when they graduated. (And yes, I know that my wife’s parents have been exceptionally generous.)
Beneficiaries on 529 plans can be changed at any time. Your inlaws can change the beneficiaries to other grandchildren if you don’t use all the money, for example. Some even use 529 plans as an estate planning tool.
Here is some info as it pertains to your situation:
Am I hurting my grandchild’s eligibility for financial aid by putting money into a 529 plan for him?
Simply owning a 529 account for your grandchild will not affect your grandchild’s eligibility for need-based financial aid, but actually using the account could have a negative impact in the subsequent year.
The value of assets owned by a grandparent (or other non-parent) is not reportable on the FAFSA financial aid application. This rule extends to 529 plans owned by grandparents.
However, if a grandparent provides any type of financial support to the student, that support is reportable on the following year’s FAFSA as student income. The financial aid formula counts student income just as it counts student assets (although the assessment percentages and allowances are different). Most financial aid offices interpret the rules as requiring distributions from grandparent-owned 529s to be included as student income, even when the distributions are not reportable for federal income taxes (i.e. they are tax-free).
If a grandparent were to use the 529 account only to pay for the final year in college, then the income rule would not make any difference, since the student will not be applying for financial aid for the following year.
While FAFSA does not ask about future or expected income or gifts at all, Profile does ask for the total amount that the student expects to receive from relatives and all other sources for the academic year that the form is submitted for. How much stock the FA office puts in any answer is hard to say. “Expected” is certainly not guaranteed, and a promise to help pay can’t really be counted on until the money has been delivered. What if the grandparents suddenly need the money in the 529 for an emergency expense of their own?
You can start using the money in the third semester, as long as you wait until January. I think most schools, even if they bill in December for the spring semester, will be OK with receiving payment in early January, before classes start.
It would make more sense for the grandparent to just write the check to the school. As a bonus, that doesn’t go against the $14,000 per year per person gift ceiling.
Thanks to all for your advice and information. I am especially appreciative about learning that the new prior-prior year policy applies to PROFILE colleges, as this will affect our planning and expectations in several ways. I may also seek some professional advice on the 529 account issues…
I am still inclined to think that we will pursue having my in-laws transfer ownership of the 529 accounts to us (if they are comfortable with doing so). While I appreciate the advice about the option of instead waiting until later to draw on the accounts so that the disbursements do not show up on financial aid forms, I am doubtful that this would work well for us, as I think we will need to use some of those resources to pay 1st-year bills. I am also inclined to guess that at least some colleges would use their discretion to take into account large anticipated gifts from grandparents when awarding aid (I would, in their position). I would prefer to avoid uncertainty about whether and to what extent this will happen, and would not feel comfortable about leaving such anticipated gifts undisclosed.