Entering college is the start of an exciting chapter in a young person’s life. It may seem inappropriate to be thinking about estate planning at that time, but there are documents that are important for a college student to have in place. Take a look at our infographic for a helpful guide on estate planning in your college years.
Entering college is the start of an exciting chapter in a young person’s life. It may seem inappropriate or even a little morbid to be thinking about estate planning at that time, but there are documents that are important for a college student to have in place, even if the more traditional elements of estate planning, like assigning asset distribution, aren’t as relevant.
The key here is that once your child becomes 18 years old, they’re a legal adult in the eyes of the government. That means if the unthinkable should happen and your son or daughter should become incapacitated, there is no legal guarantee that you, as a parent, can step in to guide financial and medical decisions unless you have certain planning documents.
Norms are changing. Every new generation brings about change, and Generation Z and the younger Millennials are reshaping the road traveled once high school is completed. Instead of taking the traditional path that older Millennials largely took, of going to college after secondary school and incurring high student debt, these young adults are taking more varied approaches to building debt-free and successful futures. Since the paradigm is changing, you need to be more flexible in how you save for college and the future for your children. A recent article from Kiplinger, “How to Stay Flexible in Saving for Your Child’s Future,” gives advice on how to be more adaptable in today’s changing college and career world.
A recent TD Ameritrade survey, as cited in the Kiplinger article, found that 1 in 5 young Americans ages 15-21 (Gen Z) and 22-28 (Millennials), may opt out of college. We’ve mentioned this in previous blogs, but one of the underlying reasons for this is that student debt is a major roadblock to life milestones and financial freedom. As the Kiplinger article points out, the TD Ameritrade survey found, “47% [of young Millennials] delayed buying a home because of what they owe, 40% delayed saving for retirement, and 31% delayed moving out of their parents’ home” (Kiplinger).
Maybe the title of this post made you scoff. You’re retired. Or maybe you scoffed because not only are you retired, but how would paying large tuition bills fit into your fixed income retirement? According to an article from CNBC, “More Retirees Are Going Back to School. Here’s How You Can, Too,” there is an upward trend in retirees continuing their education as well as programs designed to promote lifelong learning through affordable pricing.
One of the programs designed to support lifelong learning is the Osher Lifelong Learning Institute (OLLI), which receives funding through the Bernard Osher Foundation. It consists of 124 lifelong learning programs through colleges and university across the US and has at least one location in every state including the District of Columbia (Osherfoundation.org). One of these locations is Berkshire Community College. One couple, Barbara and Ed Lane, have found fulfillment in attending Berkshire’s OLLI program. As Barbara shares in the CNBC article, she has pursued local classes for older adults and she now sits on the board for the Osher Lifelong Learning Institute at Berkshire Community College. Her husband attained his master’s in business administration from there and now teaches at other colleges as a finance and economics adjunct professor.
The answer “It depends” is not much of a comfort when considering how college savings accounts will be treated for Medicaid purposes. However, it is, unfortunately, the most accurate answer. There are several factors that must be considered:
1. What type of account you used to set aside the college money;
2. How and when you funded the account; and
3. Whether you still have access to the money.
A recent nj.com article asks, “Will my college savings be counted for Medicaid?” If you can liquidate an account and access the money that you deposited, Medicaid will typically expect you to do so to fund your own care for as long as possible. Another challenge is that Medicaid will always penalize gifts. Odds are good that the funds you added to these college accounts are gifts.
Many people with disability income owe student loans. Although deferring repayment or working out a repayment plan based on the individual’s income are possible options, there’s also a process for discharging student loans completely – and it’s cost-free. It’s called a total and permanent disability (TPD) discharge. This U.S. Department of Education website explains the process: https://www.disabilitydischarge.com/Application-Process
With Grandparents Day approaching on September 10, we celebrate the special relationships between grandparents and their grandchildren. With the cost of a college education continuing to rise exponentially, a 529 plan is generous gift that you can give to your grandchild. You’ll be able to save for your grandchild’s future, get some good tax breaks and maintain control over the account, according to a recent article appearing on nj.com, “529 plan funding for a grandchild. ”The earnings are tax-free, as long as the funds are used for educational expenses.
The recipient grandchild won’t have control over the account or when distributions are made, and the owner can change the beneficiary of the account to a different member of the beneficiary’s family at any time. This can be crucial if the account’s overfunded or not used by the grandchild. The definition of family member is quite broad and includes cousins and spouses of family members. In the event that you need the funds yourself, you could take a distribution.
If you did take a distribution, there’d be a tax owed and a 10% penalty on the earnings portion of the withdrawal since it wouldn’t be used for qualified education expenses. This gives grandparents some safety, if they need access to those funds.
The grandparent owner can also use 529 plan contributions as part of his or her estate plan, because it removes funds from the grandparent’s taxable estate. The contribution is considered a gift subject to the federal gift tax, but there’s an annual gift tax exclusion. It’s currently $14,000 per beneficiary per year, which is not subject to the gift tax.
Some grandparents will also front-load a lump sum of up to five times the annual exclusion amount to each beneficiary. They must then wait five years before the total gift to that same beneficiary would be eligible for the maximum exclusion. Even if the gifts go over the exclusion amount, there is a lifetime exemption amount, which is currently $5.49 million dollars.
Some states don’t have a gift tax on lifetime transfers, but there are those that have an estate tax on estates valued in excess of a specific amount, which should be taken into account when estate planning.
It is important to be aware that you may already have estate planning in effect using the annual gift tax exclusion, with a life insurance trust or family limited partnership as part of your plan. If you’re thinking that someday you may need Medicaid assistance, your state will probably deem any 529 accounts you own to be your own assets. As a result, you’d have to deplete them before qualifying.
Finally, when your grandkids start looking at colleges, make sure to talk about these accounts with your kids. The 529 accounts –including those owned by family members—will be considered as assets belonging to the grandchildren for purposes of determining how much financial aid the school will offer.
Reference: nj.com (May 12, 2017) “529 plan funding for a grandchild”
A finely-tuned savings plan that begins early in adult life with disciplined savers who do not deviate from the plan can save enough money to send kids to college and save for retirement at the same time. According to a CNBCarticle, “Saving for college and for retirement isn’t impossible,” it doesn’t hurt to have generous grandparents, but can certainly be done without them too. All you need is a solid plan and the perseverance to stick to it.
The cost of education is going to be highest for parents with younger children. For a couple with a newborn, it’s projected to cost upwards of $455,585 to send him or her to a four-year private institution. The expected cost of a public institution? Approximately $202,768.
One good way to plan is to make use of a 529 plan. Administered by financial institutions or by states, these college savings tools provide a number of benefits:
- 529 plans are professionally managed so you don’t have to! Plus, they’re readily available through either your financial planner or through state exchanges. If you go with a plan from your state of residence, there could be some tax benefits, too, so speak with your financial professionals about whether that could be a good opportunity for your family.
- All contributions are after-tax, but as long as the funds are used for education-related expenses, any appreciation of the account’s value is tax-free.
- There is no gift tax or gift tax return filing requirement if you want to contribute $14,000 in a year to the account. There could also be an opportunity to make a lump sum contribution of up to $70,000 (or $140,000 for married couples filing jointly) to a 529 if the gift is spread over five years. You’ll want to coordinate with your financial professional, CPA and possibly your estate planning attorney to really get it right.
- 529 plans won’t necessarily damage a child’s eligibility for financial aid. You’ll want to work with an experienced financial profession to make sure, but it’s certainly possible to minimize the impact. For grandparents looking to contribute a gift to a 529 plan in their estate, you’ll want to do some extra-careful planning with your estate planning attorney to ensure you’ve designated the correct beneficiary and won’t inadvertently trigger taxes.
- Some plans may allow you to “pre-pay” between one and four years of tuition. Since you pay today’s rates instead of future rates, the potential savings opportunity is significant. You’ll want to read the fine print, though, as these options may apply only to specific colleges. Talk with your financial professional to ensure you’re picking the best plan for your family.
Even with an aggressive savings plan, college could still be a stretch, especially for multiple kids. It may be necessary for a student to take out a loan. The good news about loans, however? Some studies suggest that kids take their education more seriously when they have a financial stake in it.
Reference: CNBC (November 7, 2016) “Saving for college and for retirement isn’t impossible”
That long-awaited, bittersweet moment has finally arrived: your children are headed off to college. They are now adults—and likely far from home, where they must learn to fend for themselves. But if they run into a problem, let’s say a health emergency, the hospital might not take your phone call.
As reported in businessinsavannah.com’s article, “College-bound children need critical financial, health documents,”there are certain steps you can take so that you will be able to speak with doctors at a hospital and college officials on his or her behalf. Otherwise, you’re not legally allowed to help him. Why not?
Many state privacy laws don’t let parents make healthcare or financial decisions for their adult children. It doesn’t matter if you’re paying their college tuition and health insurance, your hands are legally tied. To solve this issue, you can have legal documents prepared that will allow you to continue in your guardianship role.
Three important documents are a power of attorney, health care proxy to assign you or another trusted adult as your child’s health care representative, and a HIPAA release. Without these, your child could be incapacitated and in a hospital or financially stranded somewhere. You could be required to petition a judge to let you help your child.
The pre-signed Health Insurance Portability and Accountability Act (HIPAA) form lets you immediately access your child’s medical records, and an In Case of Emergency (ICE) card can fit in a wallet and provide all his or her approved emergency contacts, health insurance info and known allergies.
Most of us don’t consider estate planning for our kids, at least not in the context of needing to care for them as adults should anything happen to them. However, if you want to be there for your college-aged child to the best of your ability, you’ll need legal basis. As they begin to transition into adulthood, they need to start thinking of their own plans for unexpected incapacity or death.
While you hope that you will never need any of these items, knowing that you will be able to help your college student if necessary will provide some peace of mind. For more information on this and other estate planning topics, explore our website and contact us to schedule your consultation today!
Reference: businessinsavannah.com (July 22, 2016) “College-bound children need critical financial, health documents”
We’ve all given someone a gift card. It’s a popular gift, especially around the holidays. In fact, a recent pollfound that 56% of those interviewed planned to give gift cards this holiday season. But there’s a new development in gift cards: you can now purchase a gift card for a 529 plan. A recent Investopedia article looks at the details. [Read more…]