As you start thinking about putting your estate plan in place, maybe you realize that you’ve already given your adult children more than most parents can. Consequently, they may be doing very well financially.
If you’re like many Illinoisans in this position, you may be considering leaving a large amount of your estate to your grandchildren rather than your children – specifically to use for their education. As the cost of college – especially private institutions – continues to rise, almost any parents can have a difficult time paying for elite schools if their kids are accepted.
How you decide to help finance your grandchildren’s college education depends in part on their age. Just remember that it’s never too early.
A 529 plan
This is a tax-deferred plan that any parent or grandparent can use to save for a child’s educational expenses. In Illinois, contributions to a 529 plan are tax deductible up to $10,000 ($20,000 for married couples filing taxes jointly).
Interest earned isn’t taxed. Neither are withdrawals (deductions) if they’re used for qualifying education-related expenses. These plans can also be used for K-12 expenses as well as vocational and apprenticeship programs if a grandchild decides a traditional college education isn’t for them.
Paying the institution directly
Maybe you have a grandchild who is in the process of choosing a university or they’re starting in the fall. Another option for helping with their expenses is to pay the school directly.
If you pay their tuition, you won’t trigger gift taxes. If you also pay for room and board and other expenses, that money may be subject to those taxes. That’s important to consider before you send any funds.
Both of these strategies can help you reduce the size of your estate so that you may be able to avoid having part of it eaten up by estate taxes after you’re gone. There are also ways to set up trusts within your estate plan to help cover your grandchildren’s education.
Before deciding what strategy you want to use, it’s best to talk with your grandchildren (if they’re old enough) and their parents. You want this to be a gift – not a source of family conflict.
Estate planning can involve a lot more than “traditional” estate plan documents. It’s an overall strategy for determining how you’ll pass along your assets to the people and the causes you care about. Getting experienced estate planning guidance is an important early step.
