A couple who are my clients have three adult daughters, all in their 20s. Two of them have chosen not to go to college for now, though they both intend to do so eventually. The third has completed two years of college classes but has put her education on hold for a few years because she’s busy with her own two toddlers.
My clients recently decided they would like to give each of the three kids some money to be used for education. Their reasoning was that it would be more helpful for their daughters to receive a few thousand dollars now than to inherit a larger sum years from now. Instead of just handing over some cash, they wanted to initially designate the money specifically for college or other education. Then, as each daughter turned 30, any money she had not used for school would be given to her outright.
After doing some research, we decided the best option would be to set up a 529 plan for each of the daughters.
I’ve written before about the advantages of 529 plans when it comes to saving for college. These state-operated plans can be set up by parents, grandparents, or other relatives. Contributions to the plan are not tax-deductible, but no federal tax is due on any earnings that are withdrawn to pay for college. The money can be used for tuition, books, and room and board, and can be used for any accredited school in any state. If the owner of the account dies, the account then goes to the beneficiary.
One of the big advantages to a 529 plan is that the account is owned by the donor, not the beneficiary. This gives the donor control over the funds. In addition, the funds are not counted as an asset for the beneficiary when it comes to qualifying for other types of financial aid. A second advantage is the plan’s flexibility. If one beneficiary doesn’t use the money for education, the donor can shift that money into an account for another beneficiary. In addition, there are no age limits for beneficiaries of these plans.
Those last two provisions were the main reasons we decided 529 plans were the best way for my clients to give college money to their adult children. The accounts can be set up now with the daughters as beneficiaries. If and when each one decides to continue her education, she can take money out of her account for tuition, books, and other expenses. If she doesn’t go to school, or doesn’t use all the money, the account will become hers in a few years.
The disadvantage of transferring ownership of the accounts to the daughters is that they will have to pay taxes and a penalty on the earnings if they use the money for something other than education. Since only the earnings are taxed, and since the penalty is ten percent of the earnings only, we didn’t see this as a significant problem.
One of the advantages of transferring ownership is that the daughters can then, if they wish, make their own children beneficiaries of the accounts. This would give them a solid head start on college saving for their own kids, while still giving them access to the account if they should need it themselves—either for education or for other purposes.
The intent behind 529 plans is to help families save for college. That saving doesn’t have to be limited to providing for young children. The flexibility of these plans makes them an excellent way to help adult children who may be going to school as nontraditional students.