Grandparents Increasingly Involved in K-12 Education Planning

by | Jul 7, 2021 | estate planning in Indiana, estate planning lawyer


529 education plans can be a good thing, not only for grandkids and parents, but for grandparents as well, savingforcollege.com explains. Helping grandkids pay for college helps seniors reduce estate tax exposure because, even if the grandparents choose to maintain control of the 529 account (with the grandchild the named beneficiary), the assets will not be included in the grandparent’s estate.

For parents and grandkids, having help from grandparents in the form of a 529 plan is very much a good thing:

  • The money grows tax-free inside a 529 plan, and withdrawals are tax free if used to pay qualified education expenses.
  • At the college and postgrad level, 529 funds can pay for tuition, books, fees, and supplies.
  • Up to $1,000 of 529 money can go towards repaying qualified student loans and even expenses for certain apprenticeship programs.

There’s a catch – if a grandparent provides any kind of financial support to a college student (including withdrawals from a 529 plan), the amount is reportable as student income on the FAFSA form, possibly reducing the grandchild’s need-based eligibility for college financial aid.

But, what about for the grandparent? Is owning and funding a 529 plan a good thing? Yes, because:

  1. The grandparent is eligible for a 20% Indiana College Choice 529 Investment Plan tax credit (which can offset some or all of their Indiana state income tax).
  2. If a need arises, grandparents may withdraw funds for their own use (income tax would apply on any growth in the account).

Although Indiana’s plan is named College Choice, effective January 1, 2019, up to $10,000 per year can be used to for qualified kindergarten through high school tuition expenses, including education at private and religious school.

Several special rules and considerations apply to the use of 529s to fund K-12 education needs:

  • The 529 contribution intended to be used for K-12 tuition must be designated as such.
  • Since the money meant to pay K-12 expenses will be used much earlier than college money, the investment strategy might be focused on a shorter term horizon.

At Rebecca W. Geyer and Associates, we encourage multi-generational planning, For many families, education funding for grandchildren using 529 plans can be a great place to start.

– by Cara Chittenden, Associate Attorney at Rebecca W. Geyer & Associates