25 Jan How to leave money to grandkids

Q. I want to leave my grandchildren money, but I’m trying to decide if I want them to inherit it or if I should put it in a 529 plan. They’re 9, 11 and 14, and I’m 78 and healthy. What are the pros and cons?
— Gramps

A. It’s very generous of you to want to leave money directly to your grandchildren. And it’s smart of you to ask while you can still act.

The pros are that you could take advantage of the annual exclusion gift, which currently is $14,000 per year per grandchild, said Jody D’Agostini, certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown. With three grandchildren, that’s $42,000 a year.

You can then exclude those amounts from your estate.

If you put the funds in 529 plans, you can still maintain control of that asset as the owner of the account, and you can make the kids the beneficiaries.

“If you need the money at some point in the future, you, as owner can withdraw money. You would be subject to a 10 percent penalty, plus taxes on the growth of the investment,” D’Agostini said.

Depending on how much you want to give, you can front load five years of contributions in one year.

The cons surround what you perceive the future need will be for your grandchildren as a 529 plan is only designed to pay qualified secondary educational expenses, such as tuition, room and board and books and other supplies, she said.

“If one of the grandchildren does not go to college, you can always switch the beneficiary to the others, but you will have disinherited that child,” she said.

Or, the child could take the funds out for non-college expenses, but be subject to the same 10 percent penalty and taxes owed.

If you go this route, you should open a separate 529 plan for each child.

This is a conversation you may want to have with an estate planning attorney to see if a trust is more appropriate.

Also talk to your grandchildren’s parents. Whatever moves you make could have unintended consequences for the kids’ financial aid prospects, so be sure you have a full understanding of other money that may be available for college.

Having the kids inherit the money outright will also have an impact on financial aid because funds in the child’s name will be considered when financial aid packages are offered by prospective colleges.

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This story was first posted in January 2016.