There are a number of ways that grandparents can help with the increasingly high cost of a college education (not to mention graduate school costs) for their grandchildren. If you want to ease that financial burden for your grandchildren (and their parents), it’s smart to do that as you’re creating or modifying your estate plan.
Even if it may not involve specific estate plan documents, the right type of college savings planning can save your loved ones from having to pay state and federal estate taxes after you’re gone. Note that along with about a dozen other states, Illinois has its own estate tax on estates valued at over $4 million.
You’ve likely heard of 529 college savings plans. They’ve been around for a long time, but they’re still a smart way to put away money for a child’s education and get some tax advantages.
The various tax advantages of an Illinois 529 plan
If you open a 529 plan with yourself as the owner and a grandchild as a beneficiary, the contributions (deposits) you make to it are no longer considered part of your taxable estate. You just want to be reasonably sure you won’t need that money. If distributions are used for anything other than qualifying expenses, you can face taxes and penalties.
Illinois 529 plans have an advantage that many states’ plans don’t. Contributions are deductible on your income taxes up to $10,000 for an individual and $20,000 if you file jointly. The interest earned on the money is tax-exempt. Illinois offers multiple options for 529 plans, so you can choose one that fits your risk and growth preferences for this money.
While only one beneficiary can be listed on a plan, the beneficiary can always be changed. For example, if you have a grandchild starting college in a couple of years, you can make them the beneficiary and then change the beneficiary as a younger grandchild reaches college age. A child can be the beneficiary of more than one plan, so a parent can have one for them, too.
A 529 plan is just one option for college savings that has the added benefit of reducing estate taxes for your surviving loved ones. There are other options. That’s why it’s wise to have experienced estate planning guidance as you determine what’s best for you and your family.
