Quote of the Week

“Our life is frittered away by detail … Simplify, simplify.” – Henry David Thoreau

Technical Corner

It was a quiet week in the markets last week. The Dow was up 0.40%, the S&P 500 was up 0.35%, and the NASDAQ was down 0.11%. This week is starting with a slow upward climb.

The Tax Reform/Tax Cut bill is in the Conference Committee’s hands to work out the differences between the Senate and House versions. We shall see what comes out of the Committee. There are sure to be winners and losers. I still will not comment until we get a final bill that goes to the President.

The UPI for the S&P 500 remains the same as last week at 24 out of 100. Our allocation for most clients remains the same: 85% equities, 0% bonds, 10% alternatives, and 5% cash.

Stephanie’s Thoughts

How Grandparents Can Help Grandchildren with College Costs

As the cost of a college education continues to climb, many grandparents are stepping in to help. This trend is expected to accelerate as baby boomers, many of whom went to college, become grandparents and start gifting what’s predicted to be trillions of dollars over the coming decades.

Helping to pay for a grandchild’s college education can bring great personal satisfaction and is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. So what are some ways to accomplish this goal?

Outright cash gifts

A common way for grandparents to help grandchildren with college costs is to make an outright gift of cash or securities. But this method has a couple of drawbacks. A gift of more than the annual federal gift tax exclusion amount — $15,000 for individual gifts and $30,000 for gifts made by a married couple in 2018 — might have gift tax and generation-skipping transfer (GST) tax consequences (GST tax is an additional gift tax imposed on gifts made to someone who is more than one generation below you). Another drawback is that a cash gift to a student will be considered untaxed income by the federal government’s aid application, the FAFSA, and student income is assessed at a rate of 50%, which can impact financial aid eligibility.

One workaround is for the grandparent to give the cash gift to the parent instead of the grandchild, because gifts to parents do not need to be reported as income on the FAFSA. Another solution is to wait until your grandchild graduates college and then give a cash gift that can be used to pay off school loans. Yet another option is to pay the college directly.

Pay tuition directly to the college

Under federal law, tuition payments made directly to a college aren’t considered taxable gifts, no matter how large the payment. So grandparents don’t have to worry about the $15,000 annual federal gift tax exclusion. But payments can only be made for tuition — room and board, books, fees, equipment, and other similar expenses don’t qualify. Aside from the obvious tax advantage, paying tuition directly to the college ensures that your money will be used for the education purpose you intended, plus it removes the money from your estate. And you are still free to give your grandchild a separate tax-free gift each year up to the $15,000 limit ($30,000 for joint gifts).

However, colleges will often reduce a student’s institutional financial aid by the amount of the grandparent’s payment. So before sending a check, ask the college how it will affect your grandchild’s eligibility for college-based aid. If your contribution will adversely affect your grandchild’s aid package, particularly the scholarship or grant portion, consider gifting the money to your grandchild after graduation to help him or her pay off student loans.

529 plans

A 529 plan can be an excellent way for grandparents to contribute to a grandchild’s college education, while simultaneously paring down their own estate. Contributions to a 529 plan grow tax deferred, and withdrawals used for the beneficiary’s qualified education expenses are completely tax free at the federal level (and generally at the state level too).

There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual investment-type accounts offered by nearly all states and managed by financial institutions. Funds can be used at any accredited college in the United States or abroad. Prepaid tuition plans allow prepayment of tuition at today’s prices for the limited group of colleges — typically in-state public colleges — that participate in the plan.

Grandparents can open a 529 account and name a grandchild as beneficiary (only one person can be listed as account owner, though) or they can contribute to an already existing 529 account. Grandparents can contribute a lump sum to a grandchild’s 529 account, or they can contribute smaller, regular amounts.

Regarding lump-sum gifts, a big advantage of 529 plans is that under special rules unique to 529 plans, individuals can make a single lump-sum gift to a 529 plan of up to $75,000 and married couples can make a joint gift of up to $150,000 (which is five times the annual gift tax exclusion) and avoid federal gift tax. To do so, a special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during this time.

Example Mr. and Mrs. Brady make a lump-sum contribution of $150,000 to their grandchild’s 529 plan in Year 1, electing to treat the gift as if it were made over 5 years. The result is they are considered to have made annual gifts of $30,000 ($15,000 each) in Years 1 through 5 ($150,000 / 5 years). Because the amount gifted by each grandparent is within the annual gift tax exclusion, the Bradys won’t owe any gift tax (assuming they don’t make any other gifts to this grandchild during the 5-year period). In Year 6, they can make another lump-sum contribution and repeat the process. In Year 11, they can do so again.

Significantly, this money is considered removed from the grandparents’ estate, even though in the case of a grandparent-owned 529 account the grandparent would still retain control over the funds. There is a caveat, however. If a grandparent were to die during the five-year period, then a prorated portion of the contribution would be “recaptured” into the estate for estate tax purposes.

Example: In the previous example, if Mr. Brady were to die in Year 2, his total Year 1 and 2 contributions ($30,000) would be excluded from his estate. But the remaining portion attributed to him in Years 3, 4, and 5 ($45,000) would be included in his estate. The contributions attributed to Mrs. Brady ($15,000 per year) would not be recaptured into the estate.

If grandparents want to open a 529 account for their grandchild, there are a few things to keep in mind. If you need to withdraw the money in the 529 account for something other than your grandchild’s college expenses — for example, for medical expenses or emergency purposes — there is a double consequence: the earnings portion of the withdrawal is subject to a 10% penalty and will be taxed at your ordinary income tax rate. Also, funds in a grandparent-owned 529 account may still be factored in when determining Medicaid eligibility, unless these funds are specifically exempted by state law.

Regarding financial aid, grandparent-owned 529 accounts do not need to be listed as an asset on the federal government’s financial aid application, the FAFSA. However, distributions (withdrawals) from a grandparent-owned 529 plan are reported as untaxed income to the beneficiary (grandchild), and this income is assessed at 50% by the FAFSA. By contrast, parent-owned 529 accounts are reported as a parent asset on the FAFSA (and assessed at 5.6%) and distributions from parent-owned plans aren’t counted as student income. To avoid having the distribution from a grandparent-owned 529 account count as student income, one option is for the grandparent to delay taking a distribution from the 529 plan until any time after January 1 of the grandchild’s junior year of college (because there will be no more FAFSAs to fill out). Another option is for the grandparent to change the owner of the 529 account to the parent.

Colleges treat 529 plans differently for purposes of distributing their own financial aid. Generally, parent-owned and grandparent-owned 529 accounts are treated equally because colleges simply require a student to list all 529 plans for which he or she is the named beneficiary.

Note:  Investors should carefully consider investment objectives, risks, charges, and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors.. Before investing in any state’s 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than higher education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.

Did you know …

  • If your grandchild doesn’t go to college or gets a scholarship, you can name another grandchild as 529 account beneficiary with no penalty
  • Many states offer income tax deductions for contributions to their 529 plan
  • Money in a 529 college savings plan can be used for graduate school too.

Paying the college

Tuition payments made directly to a college aren’t considered taxable gifts, no matter how large the payment. But this is true only for tuition, not room and board, books, or fees.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017

By the Numbers

WHERE THE WORK WILL BE – An estimated 35% of the jobs to be created in the next decade (i.e., 4 million of 11.5 million projected new jobs) will be in health care and “social assistance.” 91% of the new jobs (10.5 million) will be in “service-providing” jobs as opposed to “goods-producing” jobs (source: Bureau of Labor Statistics).  Michael A. Higley, BTN 12-11-2017

If you have friends or family in need of financial life planning services,

It would be the honor of Laurence Lof Financial Advisors to assist them.

We value your referrals!

  Follow us on Facebook: https://www.facebook.com/LaurenceLof/

These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

Share This