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.
A Uniform Gift to Minors Act allocation allows a minor to own securities (such as a mutual fund) without having to set up a trust through a lawyer. The Uniform Transfer to Minors Act is similar, but it permits a minor to own other types of property, such as real estate, royalty interests, patents or transfers via an inheritance. State law governs these accounts.
One potential downside is that control of the property shifts to the minor at age of legal adulthood, usually age 18. We love the little darlings, but we know that some 18-year-olds are not yet mature enough to handle such funds or have issues rendering them ill-suited to manage property, especially if the amounts become significant.
Trusts that transcend the age of majority require a sharp attorney and financial adviser well-versed in tax and other implications. With increased longevity, some grandparents may want to skip over their children, who may be doing fine in their own right, and endow grandchildren or even great-grandchildren. Again, well-thought-out trust planning is vital. If you wish to leave minor assets held in a qualified retirement plan, such as an individual retirement account, you must do special planning. There are complications if you make the minor a beneficiary by name.
For some reason, the incidence of children with special needs is on the rise. Autism, cerebral palsy, epilepsy, Down syndrome, learning difficulties and other challenges can strain family fabrics and budgets, increasing the need for funding. Down syndrome children, for example, now have an average life span of 60 years. Life insurance contracts, including last survivor or second-to-die policies (which cover a couple and pays out after the death of the last spouse) may be efficient devices to fund special needs trusts for such children.
The fun will come with grandparents joining their children and grandchildren at the beach, adventure trips, Disney cruises, Club Med and get-togethers for holidays and special events. May the circle be unbroken!
-- By Lewis J. Walker, CFP, president of Walker Capital Management and Walker Capital Advisory Services in Norcross, Ga., a registered investment adviser in securities and certain advisory services offered through the Strategic Financial Alliance. Walker is a registered representative of SFA, which is otherwise unaffiliated with Walker Capital. 770-441-2603. firstname.lastname@example.org .
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