Month: August 2016

Giving Grandkids Money for College

When a grandmother wants to give her two grandkids $50,000 each for college, there can be tax and financial aid consequences. The best way to go about this depends on what’s most important to the grandmother, says New Jersey 101.5’s article, “Several ways to gift money for college.”



If grandma just wants to help the grandchildren with their education, she could set up a 529 plan for each child and contribute $50,000 to each account. 529 plans are tax-deferred accounts that are used for education. If the kids are young, the account could grow tax-free for years before it’s needed.

It’s a very tax-efficient way to pay for education; however, there can be gift tax issues when setting this up. In general, grandma is permitted to give each child $14,000 a year without using up any of her lifetime gift/estate tax exemption. Nonetheless, there’s a special rule for contributing to a 529 plan. If grandma contributes the $50,000 in the first year, it’ll be prorated over the next five years at $14,000 a year—a limit with little effect because the federal estate and gift tax exemption amount is now $5.45 million.

Grandma needs to remember another option: the payment of tuition directly to the educational institution is not a taxable gift at all, regardless of how large the payment. Bear in mind that the direct payment of tuition could jeopardize the child’s financial aid eligibility. If this is a concern, a 529 plan account is a better option, but grandma—not a parent—must be the custodian. If the parent is the custodian, the plan will most likely be deemed an asset of the parent, and this would have to be reported on the child’s financial aid application. Once payments were made out of the account, this would be considered income to the child and could put his or her financial aid in jeopardy.

Planning for financial aid can be tough because each school has its own set of rules. Grandma could also just wait until the kid is out of school completely and then give him or her the funds to pay his or her student loans. If the child is likely to get financial aid, she could make gifts for other purposes like a down payment on a house or a wedding—instead of paying for school.

Reference: New Jersey 101.5 (July 14, 2016) “Several ways to gift money for college”

A Close Look at the Costs for End-of-Life Care

A recent study showed that people in the U.S. fear developing Alzheimer's disease more than any other major life-threatening disease—including cancer, stroke, heart disease and diabetes. It also found if diagnosed with the disease, most have deep concerns about their inability to care for themselves. Burdening others by losing memory of life and loved ones was the second greatest concern, according to the MarketWatch article, “What to know about Alzheimer’s and retirement planning.” 8-29-2016

A survey of about 1,000 adults by Harris Interactive showed that the percentage of people who fear getting Alzheimer's has risen much more since 2006 compared to other diseases. This means it’s critical to properly plan for your retirement years early in case you or a loved one becomes afflicted. Take a look at the breakdown in terms of dollars for care between three common diseases:

  • Cancer: $173,400
  • Heart disease: $175,100
  • Dementia: $278,000

These potential medical expenses must be considered in retirement and estate planning. Some of it can be paid for by insurance, Medicare and Medicaid. However, a large amount needs to be paid out of pocket by the family. In most instances, the total cost of care by family caregivers isn’t included in estimates because much of that time is just "helping out," and there’s no cost figure against this. Similarly, there’s no estimate on the amount of lost income family-care providers would have earned if they weren’t involved in the care giving.

Financial planning often gets delayed, but there are many tasks that should be done to make things easier and to avoid complications down the road. Identify family members who should be included in financial plans, like those who can help with routine financial responsibilities. You also should identify the projected costs of care when it comes to Alzheimer's and dementia because those costs are so high. Review any available government benefits, along with Medicare and long-term care policies.

Reference: MarketWatch (July 7, 2016) “What to know about Alzheimer’s and retirement planning”

The Importance of Beneficiary Designations

THV11’s recent post, “The importance of beneficiary designations,” explains that designating beneficiaries is a very important part of the proper handling of many documents—like life insurance, retirement accounts, bank accounts and investment accounts. Each of these may ask you to designate a beneficiary in the event that something happens to you. A beneficiary designation is your legal direction to the account administrator regarding who should get the money in your account if you were to die prior to using the money yourself. 8-26-2016

Many name a spouse or a child as a beneficiary but don’t realize that there can be legal issues to consider when making this selection. Also, it’s important to keep these choices up-to-date with changing circumstances.

As an illustration, some folks who have owned life insurance policies for a very long time haven’t looked at their policies in many years. When they review the policies, items of concern often pop up—like an ex-spouse or a dead relative still named as a beneficiary.

Retirement accounts—like IRA accounts, 401(k)s, and 403(b)s—require up-to-date beneficiary designations to be on file with the plan sponsor. With retirement accounts, typically the best primary beneficiary will be your spouse and the secondary beneficiaries will be your children.

However, if you have a trust created as a part of your estate planning strategy, the trust may be a beneficiary of last resort. That’s because there’s a difference in tax treatment of living persons vs. trusts.

Also, a living person is generally the right designation for a beneficiary of a retirement account, but a qualified charity could be a beneficiary of a retirement account. Speak with your estate planning attorney for help naming beneficiaries.

Reference: THV11 (July 5, 2016) “The importance of beneficiary designations”