Giving an Unforgettable Gift to Your Grandchild
Graduation season has come and gone, but if you have grandchildren who have just graduated or will soon graduate, you may be thinking about a significant gift you'd like to give them. Instead of clothes that will soon be out of fashion or a computer they'd rather pick out themselves, why not help them invest in their own future? Here are some ways you can help with their college education fund.Cash gifts -- Although it's natural to think more about wills and legacies, what better way to give than when we can still see the benefits of our generosity? In 1999, any one person can give up to $10,000 each year to any number of receivers. The gift is not taxable to the receiver and is not subject to federal gift taxation. Cash gift-giving is also a useful way for parents and grandparents to reduce the size of an estate. Remember, estates of more than $650,000 (inherited in 1999 by someone other than a spouse) may be subject to considerable estate taxation. Assets that are considered part of your estate will include all of the funds within your retirement plans -- not just ready cash and the market value of your home.
Tuition gifts -- If you are affluent, and your grandchild's college costs are high, you may want to give a more generous gift than $10,000 each year. Payments to a college for tuition are not subject to gift taxes, no matter what the amount. You will need to make your check out directly to the college or university, rather than to your grandchild. This saves him or her the burden of student loan repayments after graduation.
Securities as gifts -- If you own a stock or mutual fund that has appreciated in value, you can give it to a grandchild, who may be able to sell it and pay less in capital gains taxes than if you had sold it. The new capital gains rate for the 15 percent federal tax bracket has been reduced to 10 percent, although high-end income tax bracket investors may face a 20 percent rate. Before gifting the security, you must have held it for a year or more. The recipient, in this scenario, must be at least 14 years old to be taxed at their own lower tax rate.
Education IRA -- This type of account can be arranged for a child or grandchild under 18, even if you already contribute to an IRA. Contributions aren't deductible, but any earnings are protected from on-going taxes. The advantage of this IRA is that distributions are tax-free if the money is used for higher educational purposes such as tuition, fees, books and room and board. The disadvantage is that the maximum contribution is $500 a year, which won't go far if college is just around the corner. To avoid tax penalties, a student must use the money before turning 30, or the beneficiary can be changed to another child in the same family. This IRA isn't available if your adjusted gross income is above $110,000 for single filers and $160,000 for joint filers.
Pre-paid tuition plans - Many states offer pre-paid tuition programs in which a parent or grandparent can buy a year's worth of tuition when a child is young, guaranteeing that tuition will be covered when the child enrolls later in life. Some states' pre-paid plans will cover tuition at any public college or university in the state; some will even cover tuition or partial tuition at an out-of-state college. Some states also offer college savings accounts. These come without guarantees, but earnings are tax-deferred. There may be residence and age requirements for these plans, and they may affect student aid eligibility. Contact the College Savings Plan Network at 606-244-8175 for more details.
Support and encouragement -- Even if you can't afford big price-tag gifts, you can still give gifts of great value: information, encouragement and support. Congress recently provided education tax breaks, including the Hope Credit, up to $1,500 a year for the first two years of college and the Lifetime Learning Credit of up to $1,000 a year for remaining years. Early withdrawal penalty rules are relaxed for tapping an IRA for education. However, there is a tax deduction for some student loan interest.
Taking an interest in your grandchildren by encouraging them to seek higher education and referring their parents to a financial advisor who can help explain the new tax benefits may be the best gift you can give.
--Judy A. Rubino, CFP is a certified financial planner in the downtown Portland office of American Express Financial Advisors. The registered office address is 1800 SW First Avenue, Suite One, Portland, OR 97201. The office phone number is 503-525-2898.
