Grandparent-Owned 529 Plans

A 529 plan is a popular savings vehicle that is used to save for future college expenses. It offers the benefit of tax-deferred growth and tax-free withdrawals for qualified education expenses. Typically, a parent owns the 529 plan for the benefit of their children. Less common are grandparent-owned 529 plans for the benefit of their grandchildren.

Increasingly, though, we are having conversations with grandparent-clients who are interested in setting funds aside for their grandchildren’s college. Changes over the past couple years have reduced the negative effects grandparent-owned 529 plans on financial aid, and scholarships.

Financial Aid

Federal financial aid includes grants, work-study, and loans. The Free Application for Federal Student Aid (FAFSA) form is completed annually and used by most public colleges to determine how much federal financial aid a student is eligible to receive. Many private colleges also require the College Board’s College Scholarship Service Profile (CSS Profile) for their own financial aid.

What Changed?

Previously, the grandparent-owned 529 plan assets were not reportable on FAFSA, but when distributions were made to the student to pay for college expenses, the distribution was counted as the child’s income, which consequently had the greatest negative impact on financial aid.

Under current federal rules, neither the account balance nor distributions from a grandparent-owned 529 plan are reportable on FAFSA. This is a big benefit for students who attend public colleges with the intention of using some form of financial assistance.

Things to Consider

  • If you have a grandchild who attends a private college that requires the CSS Profile, the grandparent-owned 529 plan—similar to parent-owned 529 plans—will be treated as an available resource, resulting in a reduction of the school’s own financial aid offer.

  • Grandparents keep full legal ownership and control of the grandparent-owned 529 plan, allowing them to decide when and how much to contribute, direct investments, choose withdrawal timing, and even change the beneficiary.

  • Contributions to a 529 plan can reduce the grandparent’s taxable estate since 529 plans are excluded from estate tax. Also, depending on the state a grandparent lives in, they may be eligible for state income tax benefits (e.g., tax credit or deduction) for contributions they make to their grandparent-owned 529 plan.

  • As owner of the 529 plan, the grandparent can take back the money by distributing it to themselves. However, the earnings portion on distributions—that are not used for qualified education expenses— is subject to ordinary income taxes plus a 10% penalty.

  • Saving for your grandchildren’s education can potentially give their parents the opportunity to focus more on saving for their own retirement and other financial goals. However, a natural concern is that parents could consciously or subconsciously dial back their own saving efforts.

Striking the Right Balance

Grandparent-owned 529 plans are one of the more tax-efficient and legacy oriented tools available. The key is treating them as a coordinated piece of a broader family wealth strategy rather than a standalone solution. That starts with conversations between grandparents and parents, setting clear expectations, transparency, and integration with the parents’ own educations savings efforts.

As always, reach out to your Tanglewood Wealth Advisor if you would like to discuss a grandparent-owned 529 plan to help save for your grandchildren’s education.

Disclosures

Your Personal Relationship with Your Advisor Matters More Than You Think

Family financial planning demands a lot of technical expertise from your advisor—coordinating overlapping goals, implementing long-term investment and tax strategies, and facilitating estate planning and charitable giving activities. But to me, there is an equally important piece of the equation I think is sometimes overlooked:

Does your advisor really know you? I am being completely serious.

The personal side of the client-advisor relationship matters just as much as the technical side. Your advisor could give you every kind of investment performance report or Monte Carlo simulation that they can devise, but if your advisor does not really know you, none of that information will truly resonate with you.

One of the most important things your advisor can do, for your financial success, is show you that they understand what matters to you, and how you relate to the people and causes that are important to you.

What does money mean to you? What are you excited about? What keeps you awake at night? How do you want to be remembered?

I could hand these questions to you in an impersonal questionnaire. Or I could get to know you and what makes you tick, and build a genuine relationship to earn your trust so that you feel comfortable to open up. In my experience, getting to know you and building a relationship has a much better success rate than reducing your financial life down to a one-size-fits-all, standardized financial planning process.

The next time you meet with your advisor, pay attention to how they interact with you. Do they ask thoughtful questions about your life, your priorities, and the same about your family? Do they actively listen and respond in a way that makes you feel understood? These small but important cues can indicate whether your advisor is a good fit for you and your family.

An advisor who really knows you and your family can become your trusted sounding board for when you have something on your mind and want candid and unbiased feedback. They can help you think through issues where the solution recognizes equal treatment and fair treatment are not always the same thing. They can facilitate discussion between generations who have different objectives. And they can even help you recognize and understand when it is the right time to push a particular topic and when it is not.

This is all to say that, if you’re looking for financial guidance, your personal relationship with your advisor has a tangible influence on your family’s ability to achieve its goals. Work with an advisor who listens, asks good questions, earns your trust and has your back, because everything you achieve together will stand on that foundation.

Remember Me? It’s Your Estate Plan, Calling.

For many people, the act of creating and implementing an estate plan is sometimes not easy and straightforward. For a lucky few, it is. Regardless of which camp you are in, getting it done is a big accomplishment to acknowledge—just remember to not let it grow stale. So, consider it a sign to review your estate plan if any of the following resonates with you:

It’s been awhile since you talked to the people (e.g., executor, trustee, agent) that you assigned important roles to in your estate plan. Have they moved far away? Has anyone passed away? Do they still want to serve? Are they capable of serving? Do they have a copy of your estate planning documents?

Your estate planning attorney has retired or is deceased. Do they have a successor? Have you talked to them? Do you know what happened to your client files? Do you have your signed original estate planning documents?

Your formerly minor children are now adults living their own lives. Are they financially responsible? Are you thinking about disinheriting or favoring a beneficiary? Are any of them on government assistance? Are you wondering if using a professional (corporate) trustee is right for your situation?

Charitable giving is of higher importance to you today. Are you unsure how much you can give without adversely impacting how much you want to go to your beneficiaries? Do you find yourself asking if it is better to give money while you are alive vs. after your death? What is the right giving strategy for you?

Your wealth has grown larger and more complex. Are you worried your existing estate plan is not appropriately structured to fulfill your wishes? Are you now concerned about gift, estate, and generation-skipping taxes?

Context can be helpful to others (e.g., beneficiary, executor, and trustees) to know why you structured your estate plan the way you did. In order to share your values and how you want them to think about your assets after your death, have you considered writing letters to the trustee (who will control and distribute the assets) and to your beneficiaries (who will receive them)? Although these types of letters carry no legal weight, they can provide a powerful message to their recipients.

If you find yourself wanting to review your estate plan, be sure to reach out to your Wealth Advisor to get together and discuss what, if any, changes or additions may be appropriate for your situation.

Helping Adult Children Buy A Home

High home prices, high interest rates, low inventory, and tough competition have made many prospective buyers feel that home ownership is out of reach entirely or they can no longer afford the home they want.

This environment has prompted new ways of approaching a potential purchase and led to more conversations with clients about helping a child buy a home. There are several potential ways parents can help but only after addressing the first and most important question:”Do we have enough to help at all?” (As Keith discussed on the previous page, our Capital Sufficiency pillar is an excellent tool that can be used to find the answer.) Once that critical question is addressed, consider the following:

Outright Gift

If you are comfortable gifting money, you could give enough cash to your adult child to buy the home outright, assist with the down payment, or help with making mortgage payments. Depending on how large the gift is and how it is structured, you may need to file a gift tax return. You may also be asked to confirm that it is a gift and not a loan so as not to interfere with mortgage underwriting.

Intrafamily Loan / Landlord

In lieu of an outright gift, you could become the “family bank” and loan the money to your adult child. This works best when financing the entire purchase. As an alternative, you could buy the house and then rent it to your adult child. In both cases it is important that you properly document any loan or rental agreement and associated tax reporting on income.

Be On The Hook

If your adult child is struggling to meet mortgage loan underwriting requirements (e.g., they are self-employed), you could co-sign the mortgage or co-borrow. The co-signer is on the mortgage to guarantee the loan for the borrower. The co-borrower has equal responsibility to pay the mortgage.

Gift or Sell the Family Home

If you find yourself in a position of wanting to downsize and your adult child wants the family home, you could sell it or gift it to them. In both cases, it is wise to hire a real estate appraiser to determine and document the fair market value of the home, as well as hire an attorney to prepare and file any required paperwork to properly document the transfer of ownership.

Each of these has its unique advantages and disadvantages along with the potential impact on your taxes (income, gift, and estate), family dynamics, liability, financial independence, and estate planning.

Helping an adult child is an admirable goal and a big financial decision to make. We encourage you to contact your Wealth Advisor if it is something you are considering.

Disclosures

Social Security Family Benefits

Social Security has three main benefit programs. The most well-known is the Retirement Benefit for individuals who worked and paid into Social Security. Even if you did not work under Social Security, you may still be eligible for benefits as a Spouse, Ex-Spouse, or Survivor.

Spousal Benefit

If you are married and never worked under Social Security, at your full retirement age you would be eligible to receive up to one-half of your spouse’s full Retirement Benefit amount, or even a reduced benefit as early as age 62. To the extent you have any work history, you would receive the higher of the two.

Ex-Spousal Benefit

In general, if you are divorced and never worked under Social Security, you may be eligible to receive Retirement Benefits based on your ex-spouse’s work history if: you were married at least 10 years, you never remarried, and you are age 62 or older. If one-half of your ex-spouse’s Retirement Benefit is higher than yours, you would receive the higher of the two.

Survivors Benefit

If you are a widow(er) and have children under age 18 (or age 19 in secondary school), you and each of your children may be eligible for survivor benefits. Your age and whether you have qualifying children at the time of your spouse’s death determines the amount of Survivor Benefit you can receive, which ranges between 71.5% and 100% of your spouse’s full Retirement Benefit at the time of death. Each qualifying child can receive up to 75% of the deceased parent’s full Retirement Benefit.

There is a limit on the combined monthly benefit amount a family can receive. It is typically equal to 150% and 180% of the deceased parent’s full Retirement Benefit at the time of their death. If the total amount payable to all eligible family members is greater than the limit, the monthly benefit amount is reduced proportionately.

If you are a widow(er) with no children and never worked under Social Security, you may be eligible to receive reduced Survivor Benefits as early as age 60 vs. the early retirement age of 62. Remarrying after you turn 60 has no effect on survivor benefits.

The Bottom Line

Your Social Security statement outlines your benefits based solely on your work history. At the end of the day what type and amount of benefit you receive ultimately depends on your specific situation and how you qualify.

Take Your Tax Ceiling Ratio With You

If you are a Texas homeowner, you are likely familiar with the term “homestead exemption.” However, there may be a wrinkle you are unfamiliar with.

When you turn age 65, you can fill out an application with your appraisal district to qualify for the over-65 homestead exemption. This is an additional $10,000 homestead exemption from school district taxes (on top of the $40,000 exemption from school district taxes for all homeowners).

The year you qualify for the over-65 homestead exemption is called the “freeze year.” The freeze year is an important concept because it establishes your “tax ceiling.” The benefit of the tax ceiling is that it caps your future school district taxes to the amount you pay in the year you qualified for the over-65 homestead exemption. This means your school district taxes may not go above the tax ceiling amount, unless you make changes to your home that your appraisal district deems to be an improvement (e.g., adding a new room or second story).

We have been asked, what happens to my tax ceiling if I move; do my property tax values reset? The good news is you can take your tax ceiling ratio with you. For example, if your home is appraised at $1,200,000 today but was valued ten years ago at $600,000 when your school district taxes were frozen at age 65, you currently have a tax ceiling ratio of 50%. If you decide to move to a new home in the same or other district, you can apply your 50% tax ceiling ratio to your new home. Your school district taxes will be 50% less than what they would be without the tax ceiling ratio applied.

The bottom line: If you are age 65 or older and are moving within Texas, make sure you take your tax ceiling ratio with you. It is a simple process. You or your title company requests a Tax Ceiling Certificate from your former appraisal district and then file it with your new appraisal district when you apply for a residence homestead on your new home.