Grandparents helping with college

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SocraticQuestion
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Grandparents helping with college

Post by SocraticQuestion » Tue Nov 12, 2019 12:07 pm

In the next year, my grandchildren will be starting college. I have sufficient assets to be able to assist them in paying for the costs. Unfortunately, I never set up a trust, Coverdell or 529, so it just becomes a direct contribution.

Here's my problem. I don't know how any contribution I may make will impact any aid that they qualify under their parents' FSA.

Specifically, would any amount I contribute reduce the aid they will receive?

cshell2
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Re: Grandparents helping with college

Post by cshell2 » Tue Nov 12, 2019 2:00 pm

Any amount you gift them will be counted as a gift on the following year's FAFSA and that is hit really hard in terms of financial aid. It's no worse than if you had a 529 and gave it to them, but it's counted as student income which is the hardest hit of all income/assets.

The loophole is FAFSA uses prior prior year when calculating, so if you gift them money in 2020, it won't "hit" their aid until the 2022-23 year. So..if you wait until after January 1st of their Sophomore year (2022), it won't matter at all (assuming they finish in 4 years).

This is just FAFSA though. If they go to a private school that uses CSS profile it could be different. I have no experience with CSS.

NotWhoYouThink
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Re: Grandparents helping with college

Post by NotWhoYouThink » Tue Nov 12, 2019 2:18 pm

It won't affect their aid if they don't qualify for aid in the first place.

The difficult part here is that you likely can't know how your contributions affect the cost of their education unless you understand both their parents' financial situation in detail, and the students' competitive position at the schools they are considering.

It is generous of you to want to help, but you need to think through what it is you want to give, and what you are or are not willing to pay for, or what conditions you would put on the help.

Are you offering $5K/year/grandchild, wherever they go, and whatever the cost to the parents over and above that amount?

Full tuition (could be up to $75K per year) to any grandchild to any college for any course of study?

Half tuition, or half of total costs, but only if they study either engineering or corporate finance?

Payments conditional on grades/behavior/visiting you over the holidays?

Wanting to assist is a generous impulse, but you need to add some specificity for it to do much good.

Jack FFR1846
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Re: Grandparents helping with college

Post by Jack FFR1846 » Tue Nov 12, 2019 2:27 pm

You can ask some questions now. Are the kids getting any need based aid? You very well may hear either no or that they're only getting Stafford loans, which are front end loaded, high interest loans which the student is 100% responsible for. The unsubsidized ones start accruing interest from day 1.

CSS asks questions like whether someone outside immediate family has a 529 (aimed at grandparents). Separate college financial aid forms may ask even more questions. They know all the loopholes we know.

Few if any Bogleheads will likely see the old grants that used to exist. I'm sure the kids' parents would be happy to see a check made out the to college to pay tuition, which does not count against your gift amount that you can give free of reporting.
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sport
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Re: Grandparents helping with college

Post by sport » Tue Nov 12, 2019 2:29 pm

What if the grandparent writes the check directly to the college/university? Is this different from gifting money to the student or parents to pay for tuition?

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RickBoglehead
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Re: Grandparents helping with college

Post by RickBoglehead » Tue Nov 12, 2019 2:35 pm

SocraticQuestion wrote:
Tue Nov 12, 2019 12:07 pm
Unfortunately, I never set up a trust, Coverdell or 529, so it just becomes a direct contribution.
Not necessarily. Some states give you deductions for 529 contributions even if you contribute then immediately withdraw. Check your state.

As to helping out, discuss with the parents and let them see how your gift, and when you give it, might affect aid, if any.
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NotWhoYouThink
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Re: Grandparents helping with college

Post by NotWhoYouThink » Tue Nov 12, 2019 2:41 pm

sport wrote:
Tue Nov 12, 2019 2:29 pm
What if the grandparent writes the check directly to the college/university? Is this different from gifting money to the student or parents to pay for tuition?
For purposes of reporting gifts to the IRS that go against your lifetime exclusion, it makes a difference. Paying college costs directly to the university is not considered a gift for federal tax purposes, and does not affect your annual or lifetime exclusion.

For purposes of financial aid it could make a difference. If the family accurately reports that help paying from college was provided to the parents from the grandparents, it probably will reduce aid, assuming the unlikely case where aid was provided in the first place. If the grandparents pay the college directly, it definitely will reduce aid, assuming the unlikely case where aid was provided in the first place. Sometimes families just do the gifting from grandparents to parents and don't report it, which would not affect aid. I'm not sure how the CSS questionnaire may have evolved to account for this since my kids' college days.

Jack FFR1846
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Re: Grandparents helping with college

Post by Jack FFR1846 » Tue Nov 12, 2019 2:42 pm

sport wrote:
Tue Nov 12, 2019 2:29 pm
What if the grandparent writes the check directly to the college/university? Is this different from gifting money to the student or parents to pay for tuition?
If the grandparent writes a check to a person, that counts towards the $15k that can be gifted without reporting and subtracting from their lifetime gifting total (which for states can be far lower than for the Federal government).

Writing a check directly to the college for tuition is not counted towards gifting. So if the tuition portion at private college is $30k in the spring and $30k in the fall, a grandparent could write 2 $30k checks and then go ahead and write the student a check for $15k and have no gift reporting requirement.
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ohai
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Re: Grandparents helping with college

Post by ohai » Tue Nov 12, 2019 3:21 pm

I don't believe grandparents paying directly to the school affects aid, as they only pay the bill once it's calculated and you don't declare extended family income or assets on your application. Someone correct me if I'm wrong.

cshell2
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Re: Grandparents helping with college

Post by cshell2 » Tue Nov 12, 2019 3:26 pm

ohai wrote:
Tue Nov 12, 2019 3:21 pm
I don't believe grandparents paying directly to the school affects aid, as they only pay the bill once it's calculated and you don't declare extended family income or assets on your application. Someone correct me if I'm wrong.
It doesn't effect aid for that year, but it is reportable income in the year they receive it for the subsequent FAFSA.

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JoeRetire
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Re: Grandparents helping with college

Post by JoeRetire » Tue Nov 12, 2019 3:30 pm

My sons weren't going to be getting any needs-based aid, so we just paid for their college educations with our cash flow.

We paid off our daughter-in-law's college loans after she had graduated. Had she been getting needs-based aid, it would not have been impacted at all.

For our grandchildren, we have set up 529s. We expect that to pay for the end years of their education, where it will have at worst minimal impact on any aid. If we are in a position to do so, we'll pay for earlier years by writing a check directly to the college after needs-based aid is determined each year.
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sport
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Re: Grandparents helping with college

Post by sport » Tue Nov 12, 2019 4:52 pm

Jack FFR1846 wrote:
Tue Nov 12, 2019 2:42 pm
sport wrote:
Tue Nov 12, 2019 2:29 pm
What if the grandparent writes the check directly to the college/university? Is this different from gifting money to the student or parents to pay for tuition?
If the grandparent writes a check to a person, that counts towards the $15k that can be gifted without reporting and subtracting from their lifetime gifting total (which for states can be far lower than for the Federal government).

Writing a check directly to the college for tuition is not counted towards gifting. So if the tuition portion at private college is $30k in the spring and $30k in the fall, a grandparent could write 2 $30k checks and then go ahead and write the student a check for $15k and have no gift reporting requirement.
Of course, grandpa can give 15K to daughter and 15K to son-in-law and grandma could do the same. This would provide 60K per year without tax implications if grandpa and grandma were able and willing to give that much.

delamer
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Re: Grandparents helping with college

Post by delamer » Tue Nov 12, 2019 5:07 pm

Seems to me that you have 3 options to help pay for college:

Write a check directly to the college.
Write a check as a gift to your grandchild.
Write a check as a gift to your grandchild’s parent(s).
Or some combination thereof.

Ask the grandchild’s parents what they’d prefer, given the amount you are gifting both this year and in the future. Let them do the research as to the most advantageous option given their circumstances.

(i am assuming that you are not concerned about future estate taxes.)

Spirit Rider
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Re: Grandparents helping with college

Post by Spirit Rider » Tue Nov 12, 2019 9:34 pm

delamer wrote:
Tue Nov 12, 2019 5:07 pm
Write a check as a gift to your grandchild’s parent(s).
If the parents turn around and use that money to pay for the grandchild's college expenses. There is well established and extensive precedence that this is considered gift tax fraud. The presumption is that this was never a completed gift to the parents and was always intended as a gift to the grandchild.

delamer
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Re: Grandparents helping with college

Post by delamer » Wed Nov 13, 2019 10:20 am

Spirit Rider wrote:
Tue Nov 12, 2019 9:34 pm
delamer wrote:
Tue Nov 12, 2019 5:07 pm
Write a check as a gift to your grandchild’s parent(s).
If the parents turn around and use that money to pay for the grandchild's college expenses. There is well established and extensive precedence that this is considered gift tax fraud. The presumption is that this was never a completed gift to the parents and was always intended as a gift to the grandchild.
I don’t understand why this is fraud. As long as any required tax forms are filed, why does it matter how the parents spend the money?

Can you elaborate?

NotWhoYouThink
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Re: Grandparents helping with college

Post by NotWhoYouThink » Wed Nov 13, 2019 10:24 am

We didn't get any help from our parents when we were putting kids through college, but if we had received a vague statement like
I have sufficient assets to be able to assist them in paying for the costs.
we wouldn't have know what to do about it. The more specific you can be with your kids about how much help you are willing to provide, and what conditions you would put on that help, the better they can incorporate your help into their financial planning.

sport
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Re: Grandparents helping with college

Post by sport » Wed Nov 13, 2019 10:47 am

delamer wrote:
Wed Nov 13, 2019 10:20 am
Spirit Rider wrote:
Tue Nov 12, 2019 9:34 pm
delamer wrote:
Tue Nov 12, 2019 5:07 pm
Write a check as a gift to your grandchild’s parent(s).
If the parents turn around and use that money to pay for the grandchild's college expenses. There is well established and extensive precedence that this is considered gift tax fraud. The presumption is that this was never a completed gift to the parents and was always intended as a gift to the grandchild.
I don’t understand why this is fraud. As long as any required tax forms are filed, why does it matter how the parents spend the money?

Can you elaborate?
A related question: If the parents pay the expenses, but are reimbursed at a later time by the grandparents, wouldn't this be a completed gift? If this would resolve that problem, how much later would it have to be? Would a week be enough, a month, six months?

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celia
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Re: Grandparents helping with college

Post by celia » Wed Nov 13, 2019 11:36 am

delamer wrote:
Tue Nov 12, 2019 5:07 pm
Seems to me that you have 3 options to help pay for college:

Write a check directly to the college.
Write a check as a gift to your grandchild.
Write a check as a gift to your grandchild’s parent(s).
Or some combination thereof.
or have the student take out students loans and pay them off when the student graduates.


Another thing to consider as your grandchildren start college is if you are going to be "fair" and offer the same thing to all of them. Here are some complications to consider:
* each child's needs are different (different colleges, financial aid (or not) for each)
* some may not go to college
* some may take more than 4 years (How many years will you subsidize?) or go to grad school
* some may go to college but not graduate
* you may not be here when the last grandchild goes to college (or could have your own financial needs)

Spirit Rider
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Re: Grandparents helping with college

Post by Spirit Rider » Wed Nov 13, 2019 2:31 pm

delamer wrote:
Wed Nov 13, 2019 10:20 am
Spirit Rider wrote:
Tue Nov 12, 2019 9:34 pm
delamer wrote:
Tue Nov 12, 2019 5:07 pm
Write a check as a gift to your grandchild’s parent(s).
If the parents turn around and use that money to pay for the grandchild's college expenses. There is well established and extensive precedence that this is considered gift tax fraud. The presumption is that this was never a completed gift to the parents and was always intended as a gift to the grandchild.
I don’t understand why this is fraud. As long as any required tax forms are filed, why does it matter how the parents spend the money?

Can you elaborate?
The IRS considers a gift to one individual that is intended for and gifted to another individual as a sham transaction. It is not considered a completed gift to the first individual, but rather it is considered a completed gift to the ultimate recipient.

Especially when a 529 is a perfectly legal vehicle to accomplish the same thing. A grandparent's contribution to a 529 owned by the grandchild's parent with the grandchild named as beneficiary. Is considered a completed gift to the grandchild.

A distribution from that 529 is not considered income to either the parents or the student for purposes of FAFSA. If there is no balance in the 529 when the FAFSA is completed there is no asset assessment for the FAFSA either

Minty
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Re: Grandparents helping with college

Post by Minty » Wed Nov 13, 2019 2:45 pm

Spirit Rider wrote:
Wed Nov 13, 2019 2:31 pm

The IRS considers a gift to one individual that is intended for and gifted to another individual as a sham transaction. It is not considered a completed gift to the first individual, but rather it is considered a completed gift to the ultimate recipient.
This confuses me a little. At least if the amount is under the annual exclusion amount, what difference does it make whether the gift, for income and gift tax purposes, goes to the parents or the grandchild? In either event, it is not income/reportable. If grandparents give more than 30K a year, it would be an issue. From the point of view of the FAFSA, if the parents are actually paying for the children's college, I don't see why the grandparents can't contribute to the parent's burden. Of course, if a form asks about gifts received by parents or children, they must be reported truthfully.
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TropikThunder
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Re: Grandparents helping with college

Post by TropikThunder » Wed Nov 13, 2019 2:56 pm

Minty wrote:
Wed Nov 13, 2019 2:45 pm

This confuses me a little. At least if the amount is under the annual exclusion amount, what difference does it make whether the gift, for income and gift tax purposes, goes to the parents or the grandchild?
Without this step-doctrine regulation, one could exceed the annual gift exclusion by funneling additional money through straw recipients (i.e., I want to give $60,000 to my daughter so in addition to my gift I also give $15,000 each to three friends and have them turn around and give all that to my daughter).

I know this isn’t the scenario being considered here, but it would still run afoul of the step doctrine because if the grandparent runs the money through the parent, they could still give another $15,000 directly to the grandchild.

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scubadiver
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Re: Grandparents helping with college

Post by scubadiver » Wed Nov 13, 2019 3:07 pm

celia wrote:
Wed Nov 13, 2019 11:36 am
delamer wrote:
Tue Nov 12, 2019 5:07 pm
Seems to me that you have 3 options to help pay for college:

Write a check directly to the college.
Write a check as a gift to your grandchild.
Write a check as a gift to your grandchild’s parent(s).
Or some combination thereof.
or have the student take out students loans and pay them off when the student graduates.
This is pretty good advice as it avoids impacts to financial aid and is above board from a legal perspective so long as annual gifts remain below IRS limits.

delamer
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Re: Grandparents helping with college

Post by delamer » Wed Nov 13, 2019 3:54 pm

Spirit Rider wrote:
Wed Nov 13, 2019 2:31 pm
delamer wrote:
Wed Nov 13, 2019 10:20 am
Spirit Rider wrote:
Tue Nov 12, 2019 9:34 pm
delamer wrote:
Tue Nov 12, 2019 5:07 pm
Write a check as a gift to your grandchild’s parent(s).
If the parents turn around and use that money to pay for the grandchild's college expenses. There is well established and extensive precedence that this is considered gift tax fraud. The presumption is that this was never a completed gift to the parents and was always intended as a gift to the grandchild.
I don’t understand why this is fraud. As long as any required tax forms are filed, why does it matter how the parents spend the money?

Can you elaborate?
The IRS considers a gift to one individual that is intended for and gifted to another individual as a sham transaction. It is not considered a completed gift to the first individual, but rather it is considered a completed gift to the ultimate recipient.

Especially when a 529 is a perfectly legal vehicle to accomplish the same thing. A grandparent's contribution to a 529 owned by the grandchild's parent with the grandchild named as beneficiary. Is considered a completed gift to the grandchild.

A distribution from that 529 is not considered income to either the parents or the student for purposes of FAFSA. If there is no balance in the 529 when the FAFSA is completed there is no asset assessment for the FAFSA either
So in order to avoid this, then the gift check should be made out to the grandchild not the parent. With any applicable tax forms filed by the grandparents.

I stand corrected.

But my basic point was that the grandparents should consult with the parents to determine the best way to help with the grandchild’s education.

WhiteMaxima
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Re: Grandparents helping with college

Post by WhiteMaxima » Wed Nov 13, 2019 4:01 pm

fund 529

markcoop
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Re: Grandparents helping with college

Post by markcoop » Wed Nov 13, 2019 4:08 pm

CSS Profile - It was mentioned earlier, so I thought I'd answer it. The CSS Profile uses the same prior prior tax year on it's form. There is a section that asks to estimate income for the prior year and future year, but I have never been able to understand how that section is used (meaning from what I understand, the formulas are based on just the prior prior year calculations).
Mark

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