How to Be a Good Grandparent

By Lewis J. Walker

NEW YORK (AdviceIQ) -- The excitement in the client's voice was palpable. He and his wife were to become grandparents for the first time. Their next step was to plan for funding the grandchilds education and bequeathing the youngster assets later on. How do they do that?

Lois Wyse, author of Funny, You Don't Look Like a Grandmother, observed, Grandchildren are the dots that connect the lines from generation to generation. There is a somewhat indescribable satisfaction in seeing a son or daughter grow up and extend the lineage chain, the next chapter in the family history.

As financial advisers, after we get the joyous news, the next question often involves establishing college savings accounts. The most popular vehicle is a 529 college savings plan, offered by all 50 states. You may select one from your own state (there may be some tax advantages) or you can buy one from another state if you like that plan's investment options better.

Money placed in a 529 plan is a gift made with after-tax money. The advantage is that the money grows free of income tax if used for qualified education expenses. Every person may gift up to $14,000 this year on behalf of a child. Couples may make joint gifts of up to $28,000. Wealthy grandparents, who may be trying to move money out of a taxable estate, may make five years of gifts upfront -- $70,000 per person per child, or $140,000 jointly. Grandparents may control the account if they wish, but in the event of their death before the account is used, ownership may pass to the mom or dad.

Another, but limited option, is a Coverdell Education Savings Account. Similar to a 529 Plan, ESAs are a potentially tax-free way to save for college. But unlike a 529 plan, which is restricted to higher education, you also may use an ESA for qualifying K-12 education. If you think private K-12 education is in the cards, an ESA may be an option.

One limit is that you may contribute only $2,000 a year to a child's account from all sources. Also, in most cases, only the parents can control a ESA, not the grandparents. If that's OK, you could gift a son or daughter the money and the parent could fund the ESA for their kids.