Here’s what grandparents should know before giving college money to their heirs.
If you’re a grandparent, you know how hard it is to resist the urge to give your grandchildren everything—the extra cookie, a special toy, even an expensive college education. In fact, you may already be funneling money into a savings account earmarked for a grandchild’s education. Nationwide can help parents plan for their child’s education expenses, but if you, the grandparent, want to pass along investment assets such as securities or real estate to a minor child, you need an UGMA or UTMA account.
UGMA and UTMA explained
Minors are not allowed to trade or even own stocks or other securities or real property. But kids can co-own anything under adult supervision. The Uniform Gift to Minors Act (UGMA) allows you to give securities to a child. The Uniform Transfer to Minors Act (UTMA) lets you transfer ownership of real property. There just has to be a custodian on the account. You can name yourself or another adult as custodian, and that person would oversee the account until the child comes of age.
Advantages
There are tax advantages to gifting assets in an UGMA or UTMA. If you want to get assets out of your estate, the government allows you to gift thousands of dollars each year without having to pay any gift taxes on it, generally up to $14,000 this year. If you have an asset you are not ready to sell, passing it along to the next generation while they are young means any income generated from the assets in the UGMA or UTMA get “kiddie tax” treatment. That means in 2013 the first $1,000 in earned income is untaxed, and the next $1,000 is taxed at a child’s typically lower income tax rate. The custodian’s tax rate kicks in on any income earned above that amount.
Potential drawbacks
Before UGMA and UTMA accounts came along, the only alternative was to hire an attorney to set up a complex trust to transfer assets to your kids or grandkids. UGMA and UTMA accounts don’t require the same level of oversight. But while these accounts may be less costly and confusing than trusts, they don’t offer the same level of control. Regardless of the account’s custodian, the assets are there for the benefit of the child. And as soon as your child or grandchild turns 18, 21 or 25 (depending on your state), the property in the account comes under their control. The money may be used for college, or it may be used to fund your grandchild’s young-adult whims. Either way, the decision is out of your hands (as is the money).
Another potential drawback to UGMA and UTMA for college savings is that these accounts have the most impact on your grandchild’s chances of obtaining financial aid. Because the financial aid formula considers 20 percent of student assets and 50 percent of student income1 as monies available to pay for college, any assets or income limit their eligibility for need-based aid.
Making a decision
So should you get an UGMA or UTMA? If you have securities or real estate to give, these accounts provide the simplest options. But if you just want to give cash, it may be easier to make contributions to a 529 college savings plan in the child’s name. The money in the 529 plan can be invested in mutual funds, stocks and bonds, or a managed fund targeted to the child’s age. The investment income within a 529 plan is not taxed at all, and some states even offer tax deductions for your contributions. If a parent saves for a child in a 529 plan, up to 5.64 percent of that amount is counted against them in evaluating financial aid.2 If the money is saved in the grandparents’ names, it is not included in the financial aid calculation at all. Plus, money in a 529 must be used for education expenses. If one child doesn’t use the funds for school, the account can be transferred to benefit a sibling or other relative. And you can withdraw the funds from a 529 if you need to, but you’ll face taxes and a potential penalty fee if the funds are not used for education expenses.
If you need help figuring out the bill for your grandchildren’s higher education, check out our college funding tool.
Sources:
[1] http://www.savingforcollege.com/financial_aid_basics/financial_aid_and_your_savings.php
[2] http://www.savingforcollege.com/intro_to_529s/does-a-529-plan-affect-financial-aid.php
The information included in this publication was developed or obtained from sources believed to be reliable. Nationwide Insurance its related entities and employees make no guarantee of results and assume no liability in connection with the information provided. This publication, and the individual articles in the publication, are for informational purposes only, do not provide a substitute for engaging professional financial advice or legal counsel, and do not constitute professional financial or legal advice. It is the user’s responsibility to confirm compliance with any applicable local, state, or federal regulations.
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