When it comes to paying for college for kids or grandkids, wealthy families often have the luxury of simply writing a check and not worrying about financial aid or loans. But taking just a few extra steps can shrink your out-of-pocket costs and even allow you to reduce the size of your taxable estate. Here’s what you need to know.
Take the Money
Many college students don’t bother filling out FAFSA (Free Application for Student Financial Aid) forms because they believe their families’ wealth disqualifies them from financial aid. That can be a mistake: While needs-based assistance may be out of reach, your student may qualify for merit-based aid. Merit-based scholarships are based wholly on nonfinancial factors, such as academic history, extracurricular activities and leadership experience. One caveat: Ivy League schools and some other elite institutions don’t offer merit-based aid.
Gifting Appreciated Assets
College funding strategies provide a number of ways to minimize your tax liabilities. One strategy is gifting appreciated assets. Married couples can give a student up to $32,000 worth of assets annually without incurring gift tax.1 If stocks are gifted, shares are transferred to the account of your child or grandchild, who then must sell them. If the student is at least 18 years old at the time of sale, the capital gain is subject to their capital gains rate. The long-term capital gains rate is 0% for those with taxable income of $40,400 or less.2 If only one parent or grandparent owns appreciated investments, one spouse can first gift $16,000 to the other before the recipient, in turn, re-gifts the assets to the student. It’s important to consult with your accountant or wealth team to make sure proper steps are taken to avoid triggering capital gains.
Using State-Sponsored Funding Accounts
A 529 plan is a tax-advantaged savings account designed to be used for the beneficiary’s education expenses. Any earnings you accrue are tax deferred while invested and tax-free when used for qualified education expenses. In addition to any growth being tax deferred, you may also be eligible for a state income tax deduction depending on your state of residence.*
The “Superfunding” Option
The 529 plan “superfunding” strategy enables families to make a large, lump-sum contribution while avoiding gift taxes and protecting their lifetime gift and estate tax exemption. The IRS allows couples to contribute up to $160,000 (the annual gift-tax exclusion multiplied by five) and treat the onetime contribution as being spread over five years for tax purposes. One benefit of superfunding is that a single large sum put to work right away in the markets has more compounding power than the same sum divided into periodic contributions.
Trimming Your Estate
The current estate-tax threshold is $24.1 million for married couples.3 Barring new legislation, it will revert to an expected $6.2 million per person on the first day of 2026. Superfunding 529s can be used to help get an estate under the threshold by removing a sizable chunk of assets from it. And while a gift of $160,000 may not fully cover the soaring cost of four years of college, families can use part of their lifetime gift and estate tax exemption4 to make up the difference. This strategy may be suitable for parents or grandparents who are certain their beneficiaries will use the funds for qualified education expenses.
Wealth Planning at Work
College funding strategies are a good example of how spending, tax management and estate planning can fit together to provide the best possible financial outcomes for families. It’s what comprehensive wealth planning is all about. For more information about funding college, don’t hesitate to contact your wealth advisor.
Footnotes:
1 “Frequently Asked Questions On Gift Taxes”
2 “Topic No. 409 Capital Gains and Losses”
3,4 “Frequently Asked Questions on Estate Taxes”
*Any earnings are federally taxed when a nonqualified distribution is taken, and a 10% federal penalty may be applied for non-qualified withdrawals. State tax treatment will vary and depending on your state of residence, there may be an in-state plan that provides tax and other benefits such as financial aid, scholarships, and creditor protection that are not available through an out-of-state plan. Before investing in any state’s 529 plan, you should consult your adviser.
The information contained herein is not intended to be personalized investment or tax advice or a solicitation to engage in a particular investment strategy. The views expressed are for informational and educational purposes only and do not consider any individual personal, financial, or tax considerations. Please consult a financial professional before making any financial-related decisions.
Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing.
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