College Funding--How Grandparents can Invest and Save for their Grandchild
Much press coverage has been done on the new “529” savings
plans as a vehicle for tax-free accumulation of money for college expenses,
and yes these plans are very attractive investment vehicles for college funding. But like
all investment options, they have their limitations too, and for some
investors there may be a better alternative. If you're a grandparent seeking to do some savings or investing for grandchildren, here is a comparison page that may help.
Variable Life Insurance offers an alternative
that offers additional flexibility for grandparents who wish to do saving
for grandchildren’s
education and who potentially want to leave larger sums of money to them
free of income and estate taxes.
This table provides a quick comparison:
| |
529 Plans |
Variable Life Insurance |
| Choice of Investments |
No- once you pick your allocation, it's
fixed for the duration |
Yes- Wide variety of fixed and variable
investment accounts that can be changed at will |
| Limitation on investment amount |
Yes- most plans max out around $250K |
No |
| Account remains in the control of donor |
Yes |
Yes, and you or your trust can designate another party
to control your account |
| Included in the estate of the donor |
Yes |
Yes or No. If policy is owned by the owner, but if
purchased via a trust or other party, then it is not included in
the donor's estate |
| Death benefit to child if donor dies before completely
funding account |
No |
Yes |
| Taxability of withdrawals. |
Currently withdrawals for qualified educational purposes
are free of federal tax. State taxation may vary. If money is withdrawn
for any other purpose, amount is subject to income taxes plus penalties. |
None, withdrawals are tax-free up to cost basis and
loans are tax-free if policy remains in effect throughout donor's
life. Death benefits are free of income taxes. |
| Gifting Power |
$60K front loaded (e.g. 5 years of $12,000 gift), per donor though this amount may be
subject to taxes if donor dies within 5 years |
$12,000 per year, per donor |
| Costs |
Similar to mutual funds with an annual maintenance
fee |
Similar to mutual funds for the sub-accounts, plus
mortality and expense charges. |
A primary benefit of using Variable life insurance for college funding is the
included death benefit guarantee that your grandchild's education will be paid for if you die before fully
funding the account. There is also no limitation on how you choose to
spend withdrawals, loans or the proceeds from a life insurance policy. Thus,
that money could be used for any purpose without the tax penalties assessed
to money withdrawn from a 529 plan that isn’t used for qualified
educational purposes (income taxes plus 10% penalty). This means that
money could also be used to help your grandchildren purchase a first
home or anything else you deem suitable.
For whom is this approach best suited? Ideally you are in good health. The
better your health the less expensive the cost of the life insurance
part of the plan. You may be surprised to know that the retirement planners who complete the Certified Retirement Financial Advisor training are knowledgeable about college funding options. Since many grandparents ask about this, it is an issue of retirement savings that is addressed in many grandparents retirement financial plan.
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