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Private Wealth
April 20, 2024

Education Funding Strategies

Expenses associated with a college education have reached staggering levels, with private primary and secondary school tuition trailing not far behind. Whether your role is that of a grandparent, parent, family member or close family friend, understanding your options can ensure your plan aligns with your education funding, tax and estate planning goals.

Options and Considerations
There are many ways to contribute to the costs of a child’s education, and each presents different benefits and considerations.

Pay As You Go: If you and your family have the ability, paying expenses directly to the school is the most straightforward approach. It’s important to make sure that your current cash flow covers the expense to ensure you do not have unplanned withdrawals on savings, investment and retirement accounts.

CONSIDERATION: Start planning early to accommodate for rising costs of education.

Preplanned Savings: There are state-sponsored tuition plans that can provide a tax-advantaged way to save money for college and other qualified educational expenses.

CONSIDERATION: Check to see if your state has any tax-advantaged tuition plans.

529 Qualified Tuition Plans: 529 plans are accessible tax-advantaged savings plans designed specifically for expenses associated with education. Contributions grow tax-free, and you do not pay taxes when money is withdrawn to pay for qualifying education expenses. There are no annual contribution limits, though plans typically institute a lifetime contribution limit. Qualified education expenses may include college tuition, fees, room and board, equipment, books and supplies required for coursework, and up to $10,000 annually for K-12 tuition, depending on the plan.
If the child is at risk of not using the funds as planned, you are able to change the beneficiary of a 529 plan anytime. The plan owner can update the beneficiary to a member of the original beneficiary’s family, which can include their spouse, child, sibling, niece or nephew.

CONSIDERATION: To maximize tax-free earning, 529 plans should be started as soon as the child is born and has a Social Security number. Using 529 funds for non-education expenses will result in steep penalties and income tax on the withdrawals.

UGMAs/UTMAs: A state’s Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) are custodial accounts, which means they allow adults to transfer cash, investments and sometimes real estate to a child. The adult acts as the custodian of the account until the child reaches the age of majority (18-25 depending on the state). At that point, the child can access funds and use them without restriction.

Because UGMA or UTMA accounts are considered the child’s property, when a family fills out the Free Application for Federal Student Aid (FAFSA), they must list UGMA and UTMA funds as the student’s asset. This could potentially affect how much aid they receive.

CONSIDERATION: UGMA or UTMA accounts are considered the child’s property, even if the child hasn’t reached the age of majority.

Grandparent Gifts

Supporting a grandchild’s education is one of the most tax-efficient and rewarding ways to transfer wealth to future generations. Grandparents can take advantage of complex estate planning strategies that facilitate wealth transfer to grandchildren.

Gifts to Students: Grandparents can give an annual cash gift or securities up to the $15,000 per individual or $30,000 per married couple annual federal gift tax exclusion. However, this could affect the student’s eligibility for financial aid.

CONSIDERATION: Consider gifting directly to the parents, who are not required to report the gift as income on the FAFSA.

Direct Tuition Payment to the School: Tuition payments for pre-K through graduate school are not taxable gifts and do not count toward the lifetime gift exemption as long as they are made directly to a qualified “educational organization” as defined by the Internal Revenue Code.

CONSIDERATION: Before making a direct payment to a school, ask if it will affect your grandchild’s eligibility to qualify for scholarships or financial aid.

Irrevocable Trusts: Irrevocable trusts, multigenerational dynasty trusts and other hybrids are vehicles that give grandparents flexibility to make tax-efficient transfers of assets to grandchildren.

CONSIDERATION: Each trust strategy has distinct estate and income tax advantages and drawbacks. Contact your estate planning attorney to maximize desired outcomes for the grantor and the beneficiaries.

A Health and Education Exclusion Trust (HEET) is designed for grandparents who want to create a trust that can cover medical and education costs for their grandchildren and future generations. This trust works best for those who have already exhausted their federal generation-skipping transfer tax exemption and is especially good for those who are philanthropically inclined. Along with grandchildren and further descendants, the trust must benefit a charitable organization and can include other beneficiaries as well. The charity’s involvement should be significant and last throughout the trust’s existence. To meet these requirements, the trustee can choose to give money to the charity each year, typically around 5% of the trust’s value. The trustee can also directly pay for education and medical expenses for a grandchild or other eligible person without triggering the GST tax.

Scholarships, Grants, Financial Aid and Loans
Some families might think they won’t qualify for financial aid, but that’s not always true. Many schools and organizations give scholarships based on merit, not money. They often still require a FAFSA, so it’s smart to fill one out each year. Loans are common too, and some are cheaper than others. Home equity loans often have better rates than government or private education loans. Parents or grandparents who want to share education costs may be willing to lend money to family members at very low rates and with terms that match values they feel strongly about.

Optimize Funding With a Customized Plan
Many factors must be considered when determining education funding solutions for your family, and often a combination of strategies may work best. Remember to start early.

Your Glenmede team can help determine education funding goals, weigh the benefits and considerations of your options and identify the strategies that will best serve your family’s educational and financial security for generations to come. It is never too early to start funding a child’s education.

This material provides information of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. Any opinions, recommendations, expectations and/or projections expressed herein may change after the date of publication. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss any matter discussed herein with their tax advisor, attorney or Glenmede Relationship Manager.