Grandparents and 529s

IF YOU HAVE grandchildren, funding 529 plans is an intriguing option with three big benefits and one significant problem. First, as mentioned in the previous section, you can gift as much as $85,000 in 2023 and $90,000 in 2024, and count it as your gift for the next five years. That can get a big chunk of money, as well as its future investment growth, out of your estate. If, however, you die before the five years are up, a pro-rated share of the gift will be added back to your estate.

Second, if you open the account rather than funding a 529 opened by the parents, you remain in control of the money. That means that, if your grandchildren’s parents divorce, there’s no risk the money will get divvied up and spent.

Third, unlike with other education accounts, your contributions to a 529 aren’t irrevocable. In other words, if you later discover that your retirement portfolio is becoming depleted, you can reclaim the money in your grandchildren’s 529s, though you’ll owe income taxes and tax penalties on any investment growth.

What’s the problem? If it turns out your grandchildren are eligible for financial aid, you’ll want to time your 529 withdrawals carefully. When applying for financial aid, a grandparent-controlled 529 doesn’t show up as an asset belonging to either the parents or the child, which is a plus. But when a grandparent makes a 529 withdrawal to pay college expenses, it counts as income for the student, which can badly hurt aid eligibility.

To get around this problem, you might use the 529 to pay college expenses after your grandchild has filed his or her final aid application, so the 529 withdrawal won’t affect aid eligibility. Problem solved? Maybe not. If your grandchildren go to a private college that requires the CSS Profile financial aid form, they may be asked to disclose whether they are beneficiaries of a 529—including those funded by grandparents.

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