When thinking of a great graduation gift for your grandchildren vacations, appliances, or dorm essentials may come to mind, but what about tuition. If you have determined that you can afford to pay for a portion of your grandchild's college, what other considerations should you keep in mind?
Assuming you have the financial means and the desire to do this, paying your grandchildren's college tuition (and other related costs) is a great way to transfer wealth to subsequent generations of your family. If you're thinking about paying your grandchild's tution, here are some things to consider:
Pay the tuition directly. Currently, the gift tax exclusion is $13,000 per person per year. This means you can give $13,000 to whomever you want each year without having to pay gift taxes or having this amount deducted from your unified gift and estate tax credit. If you are married, you can double this annual gift tax amount. However, if you pay the tuition directly to the educational institution, this amount is exempt from gift taxes and doesn’t count against the unified credit. This only applies to the cost of tuition, but you could also combine the direct payment with a regular gift if you want to cover additional costs such as room and board, books, etc.
Contribute to a 529 college savings plan. These plans are offered on the state level. They generally come in two flavors: accounts that allow for the use of various investment options (individually or in age-based funds) or prepaid tuition plans that allow you to buy “units” of future tuition at institutions in your state.If the child beneficiary doesn’t attend a school in the program, there are allowances for the benefit to be used elsewhere. A grandparent (or anyone else) can make contributions annually up to the gifting limits described above. Alternatively, you can make a lump-sum contribution of five years’ worth of gifts ($65,000, or $130,000 for a married couple) to each grandchild’s account.
For more information on how to best invest in your grnadchild, check out Roger Wohlner's blog on the Equifax Personal Finance blog: http://retirement.equifax.com/2011/02/should-you-pay-your-grandchildrens.html
Ilyce Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com, The Equifax Personal Finance Blogand CBS Moneywatch She is Chief Content Strategist at RealtyJoin.com, a community for real estate investor