18 Nov Help with surprise college savings

Q. I’m trying to save for college for my grandchildren without telling their parents. Do I need the kids’ Social Security numbers to start 529 plans? What are my options?
— Grandpa

A. It’s terrific that you want to save for your grandchildren, but you may want to reconsider making it a secret.

You do need the Social Security numbers of those you wish to name as beneficiaries on 529 accounts, said Matt Masterson, a certified financial planner with RegentAtlantic in Morristown.

If you don’t have the Social Security numbers, there may be another option.

More on that in a moment.

First, a major benefit of a grandparent-owned 529 account is that when the student fills out the FAFSA application, the assets are not reportable on that form. If the accounts were owned by the parents, they would be reportable, Masterson said.

But when the 529 funds are used, those assets will count as income on the following years FAFSA application.

“It is usually best to leave 529 assets owned by a grandparent until the latter years of college,” Masterson said. “This will minimize the impact on the student’s ability to qualify for other aid.”

Back to your question. 529s provide great flexibility when it comes to changing beneficiaries.

If you change the designated beneficiary to another member of the family, there are no income tax consequences, Masterson said. The IRS definition of family is quite broad and includes spouses, children or any descendants of them, parents, siblings and others.

Masterson said this means you could open up the 529 plan, list yourself as the beneficiary and later change the beneficiary to your grandchildren.

“However, since the new beneficiary is of a different generation than the prior beneficiary (yourself) the change may be treated as a gift for gift tax calculations,” Masterson said. “For instance, if you contributed $10,000 annually for 10 years and after the 10-year period changed the beneficiary to your grandchild, the $100,000 of contributions would be considered a gift.”

Masterson said you can apply your annual gift-tax exclusion ($14,000) or make a five-year election ($70,000), but the remaining balance would be taxable as a gift.

An important detail in all of this is who you list as successor owner on the accounts.

“If something should happen to you before you have the opportunity to change the beneficiary, the successor owner would have total control of the account – including the ability to withdraw funds and change beneficiaries,” Masterson said

He recommends you coordinate with the 529 plan you will be using so you do not run into any roadblocks in the account set-up process.

“During this process, it is important to remember that you are not limited to just your state’s plan,” Masterson said. “Many states, including New Jersey, do not provide for any tax deductions associated with 529 contributions. In these cases, it is important to focus on investment options and plan expenses in choosing which state plan to move forward with.”

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This post was first published in November 2016.