Do you hope to help your grandchildren pay for college someday? As college costs continue to increase, more and more students are depending on 529 college saving plans, as well as expecting to qualify for federal financial aid. For those students fortunate enough to have family members that are able to help contribute to a 529 plan account, the question often arises as to who should own the 529 account – a grandparent, a parent, or the child themselves?
This question becomes difficult to answer when the student also needs to qualify for federal financial aid. To compound this even further, the PPY rule (“prior prior year”) was passed in 2015. This is a change that will go into effect starting in the fall of 2017 and will impact students qualifying for financial aid as this rule looks back 2 years in order to look at income to help determine federal financial aid. So, who should be the 529 account owner?
If the 529 plan account is owned by the parent, then it is considered a parental asset for financial aid purposes. (5.64% of the value of the account is annually considered to be counted towards the Expected family contribution (EFC) and is considered on the FAFSA (Free Application for Federal Student Aid). Although qualified tax free distributions are not counted as income for the EFC calculation.
In this scenario, the student is considered the account owner and beneficiary. As long as the student is a dependent of the parent, the account is also considered to be an asset of the parent and would have the same EFC impact on the FAFSA. Qualified, tax free distributions are not counted as income for the EFC calculation.
Many have resulted to opening 529 plans that are owned and controlled by the grandparent. This is done as a 529 plan account that is owned by the grandparent, is not considered an asset of the student. The balance of the account does not require an EFC calculation, although qualified, tax free distributions are considered income. This would be the recommended option for a situation that involves a younger child who has many years until college. Here, the contributions grow tax deferred and the grandparent is able to reduce their taxable estate through gifts. If possible, funds from the grandparent owned 529 plan should be accessed and used the last two years of college. (Due to the “prior prior rule”).
If the grandchild is older and ready to attend college, it is most beneficial to have the grandparent make the direct tuition payment to the college institution. This reduces their own taxable estate, does not count towards their annual gift tax exclusion (currently $14,000), and does not impact qualifying for financial aid.
Do you want to change the ownership structure of existing 529 plans? Each state sponsored plan has different restrictions, but generally speaking, you should be able to change the account owner. The best way to find out is to call the administrator of the plan. If you want help setting up 529 plans, please give me a call.