Grandparent's 529 Plan

[Yardley CPA]

MFJ, Retired couple have 529 plans for their two grandchildren.  Their son has asked for some of the funds to pay for their granddaughters 2021 college expenses.  The question is what's the best way to accomplish this.  In my opinion, having the 529 disburse the funds directly to the school is the cleanest way.  With that said, there are some implications to that in regard to aid being received by the student.  It could impact that aid negatively.  Can my clients have the amount needed disbursed (disbursement will be made in 2021) to them and then they write their son a check?  No one is trying to misconstrue funds in any way.  We're only talking about $4,000 in total.  Growth on that amount is only a few hundred dollars.  Just trying to determine the best way to accomplish this without any tax implications to my client and without negatively impacting the aid the student is receiving.  Your thoughts please!

[Lee B]

I have a foggy memory that the biggest issue is that the way it's disbursed may affect the way it's reported on the FAFSA affecting the amount of financial aid ?

[Yardley CPA]

7 minutes ago, cbslee said:

I have a foggy memory that the biggest issue is that the way it's disbursed may affect the way it's reported on the FAFSA affecting the amount of financial aid ?

Correct....if it's disbursed directly from the Grandparent's 529 to the school it does impact the FAFSA.  I'm thinking they have the disbursement made to their checking account in 2021 and then transfer the funds to the son for payment to the school.  I don't think there are any tax implications to that. 

[Randall]

I'm not sure about the FAFSA reporting.  But I think there are some new rules and options for the 529 accounts.  Primary & secondary school eligibility and also payments toward student loans.  This may be limited to $10k.  But if FAFSA is affected, it may be better for the student to borrow more and then have the 529 funds go toward the loan.

[Jack from Ohio]

On 11/3/2020 at 4:24 PM, Yardley CPA said:

Correct....if it's disbursed directly from the Grandparent's 529 to the school it does impact the FAFSA.  I'm thinking they have the disbursement made to their checking account in 2021 and then transfer the funds to the son for payment to the school.  I don't think there are any tax implications to that. 

If you follow this path, the grandparents will pay a 10% penalty, due to the disbursement, from them, was not used for education.  The funds will be considered a gift to the parents.  

This is why 529 plans should only be in the parents' name.  Grandparents can give cash to the parents, then it can be put in the parents' 529 plan, which will not affect the FAFSA calculation at all.

It is a good thing that the grandparents want to help, but they were not given information about the proper way to do so.

[Philip1117r]

If they distribute the funds in the child’s final year in school then no hit to financial aid.

[Medlin Software, Dennis]

8 hours ago, Jack from Ohio said:

This is why 529 plans should only be in the parents' name.  Grandparents can give cash to the parents

Not quite to that point myself, but I suspect there are cases where a grandparent would not be willing to give money to the parent directly, which is how it appears it should be done rather than grandparents contribute directly to parents 529.  For us, we are appreciative of the ABLE account aspect of 529, and our main focus is figuring out how to max that out before our time is done.

Can the plan be transferred from the grandparent to the parent?

In our case, child attended community college, pay as you go, then transferred.  We borrowed what we could, but only had to pay 2 years worth.  Might have worked for a grandparent 529, if the ability to pay out during those last year or two would not be a negative sum process.  Of course, he is now looking at med school, if it is cost effective compared to his current career path.

FAFSA planning is good practice for medicaid and SS planning (I suppose)... and for many, needs to be a service bought.

 

What I found online:

Change account owner. If the 529 plan allows, the grandparent can change the account owner to the parent. This will minimize the reduction in financial aid the next time you file a FAFSA. Check to see if your state will recapture state income tax benefits if you change the account owner.

Rollover 529 plan funds. Grandparents can roll over a year's worth of funds to a parent-owned 529 plan. If the rollover occurs after the FAFSA is filed, the funds won't be reported as an asset on the FAFSA (assuming the funds are spent before the next FAFSA is filed). Distributions will not affect aid eligibility because the 529 plan is owned by the parent. It’s important to note, the parent-owned 529 plan should be opened in the same state as the grandparent-owned 529 plan to avoid recapture rules when funds are rolled over to a different state’s 529 plan.

Take a distribution later. If the student will graduate in four years, grandparents can wait until January 1 of the student's second semester of their sophomore year in college to take a distribution, after the student has completed his/her last FAFSA. This is because the FAFSA uses the prior-prior year’s income and tax information to calculate eligibility. If the student will graduate in five years, families should wait until January 1 of the student’s junior year to take a distribution.