Most people would prefer that their children and grandchildren do not have to go into debt to get an education. If they can find some way to pay for the education, besides having college students take out student loans, it is what most parents and grandparents would prefer.
It is common for people to take this into consideration when they visit an estate planning attorney, because they would like their estate plans to account for future educational expenses. There are a few good ways that the educational expenses of children and grandchildren can be covered, as The Legal Intelligencer recently explained in "How to Make Tax-Efficient Gifts to Children, Grandchildren for Their Education," including:
- 529 plans are investment vehicles that allow people to put money in tax free. The money can then be used for the educational expenses of a beneficiary later. Withdrawals for education are also tax free.
- Irrevocable trusts are another option. They do not have the same tax benefits. However, they can be grantor retained trusts allowing the settlor to have control over the assets, so they can be invested appropriately.
- Another option is to pay the child’s or grandchild's tuition directly. Educational gifts made in this way are not subject to gift taxes.
- IRAs can also be used for this purpose, when gifts to children or grandchildren are used to fund their own IRAs. However, you should consult with an accountant first, because there may be unintended tax consequences, if not done properly.
Reference: The Legal Intelligencer (Feb. 12, 2018) "How to Make Tax-Efficient Gifts to Children, Grandchildren for Their Education."