Posts

The Confidence and Strategy to Help Your Grandchildren Pay for College

In addition to answering your three biggest questions, 1) “Do we have enough built up in our Retirement Bucket to free ourselves of dependence on a paycheck from work,”  2) “How much can we afford to spend without running out of money,” and 3) “How can we make our Retirement Bucket™ last,one of the benefits of designing your Retirement Blueprint™ in our program is the ability to determine precisely how much you can afford to help your children and grandchildren without jeopardizing your long term financial security. 

This has been a real eye opener for many new members over the years as they had no idea how much they could afford to help, so they held back.  Now that they know exactly how much they can afford to help if they choose to, their questions all center around “how” to help, i.e. where should they invest?

There are several factors that go into selecting the best approach, such as the child’s age, and thus proximity to college, the family’s financial aid strategy, and the amount of money you’re looking to invest. 

However, in the overwhelming majority of cases with our members, the answer is pretty straightforward: 529 College Savings Plans

For the purposes of this discussion, I’m going to assume that your children will be saving for their kids’ education costs, and not planning on receiving financial aid.  

A strategy of hoping for financial aid is just that: hoping.  As you know, the priorities of the government change all the time so counting on financial aid is not a sound long term strategy.

How 529 Plans Work

Let’s take a look at the benefits of 529 Plans:

  • 529 plans are set up with you (or your child/grandchildren’s parent) as the custodian and the grandchild as the beneficiary. You may have all investment statements and correspondence sent to you exclusively, or to your grandchild as well.
  • You retain control of how the money is invested in the plan. Most plans offer a large selection of investment options as well as “age-based portfolios” where the company automatically adjusts the allocation of the investments to coincide with your grandchild’s age and years remaining before the money is needed to pay for college. 
  • All money deposited into the plan grows tax deferred just like your IRA. This is the first BIG long-term benefit.  You will not receive a 1099 each year to report gains on your tax return.
  • As long as the money is used to pay for education expenses, such as room, board, tuition, books, etc., all money is withdrawn from the plan tax free, similar to a Roth IRA. This is the biggest benefit.  Imagine how 18 years of growth would be taxed under normal circumstances!
  • If your grandchild decides not to go to college, you have two choices:
    • you may transfer the balances in the plan to another grandchild without paying taxes, or
    • your grandchild will simply pay taxes on the gains generated in the plan over the years when he or she withdraws the money to pay for anything other than college.
  • Plans have become very liberal, so your grandchild may use the money to pay for virtually any college. In other words, most plans don’t have a limited “approved” list such as in-state schools only.
  • In the new Secure Act, 529 balances may now also be used for private high school expenses (with certain limitations).
  • The last big benefit is that 529s are an estate planning tool for you. All funds deposited into a 529 Plan are considered a gift and are removed from your taxable estate.  Over the years, many Relaxing Retirement members have used this technique to systematically move funds out of their estate which would otherwise be taxed as high as 50% when they pass away. 

The last factor you will want to consider is which 529 college savings plan to invest in.  There are several good ones out there.  Take your time to evaluate the quality of investment options offered and the fees they charge to run the program. 

Tax-deferred or not, what drives the real value of these plans, like all other investments, is the quality of the underlying investment options available. 

If you need help selecting a plan, let us know. 

Once you have the plan set up, step back, and feel great about the fact that you’re helping your grandchildren get off to a better start than you did. 

Imagine how your grandchild may feel someday when he or she finds out that the reason they’re able to go to the school of their choice is because you helped pay for it by investing for them!

That will make it all worth it.

Download the PDF

Why a Revocable Living Trust Provides the Most Control

While a Will, Durable Power of Attorney and Health Care Proxy are all important and necessary pieces of an effective estate plan, a revocable Living Trust provides three levels of control that the others do not. 

Control Over Timing

A properly structured living trust allows you to specify when you want who to get what in a way that a will does not. It gives you the power to delay passing on your assets to one or more of your beneficiaries while paying out immediately to others. You can stagger the delivery of funds over time, or stipulate conditions on their distribution on a person-by-person basis such as having funds available upon graduation from college.

Control Over Circumstances

Setting up a living trust gives you the freedom to decide, in advance and with great specificity, what you want to have happen in every scenario: if one spouse is incapacitated and the other is not, if both are, if one is healthy and the other passes away, and in the event that beneficiaries divorce. A living trust allows you to spell out exactly what happens, who’s in charge, who gets to make what decisions, and where your assets go. A will can’t give you that level of control.

Control Over Probate

Probate involves validating a person’s last will and testament in a court of law.  The will must be presented by an attorney to the court in the jurisdiction where you live. Once a judge declares it valid, notice is given to any potential debtors, and all of your assets are listed in the newspaper. Although it’s time-consuming, expensive and invasive, every will must be validated before it becomes a legal document on which anyone can act.

If you’ve ever had the unfortunate job of settling an estate for a family member or friend who didn’t have a proper plan in place, then you know just how awful the probate process can be.

A properly funded revocable living trust allows your family to avoid the probate process entirely, something a will can’t do. 

WARNING #1: Your estate planning attorney may suggest that you don’t need a living trust because your estate will owe no federal estate taxes upon your death based on current laws. 

And, in many cases today that is true because estate tax exclusions have rapidly increased in the past few years to $11.58 million per individual on the federal level or $23.16 million for couples. 

In Massachusetts, however, the estate tax exemption is still only $1 million per person.

However, the real problem as I described above is the cost and delay of the probate process.  And, only a properly funded living trust can help you avoid it.

WARNING #2: “Creating” a Living Trust alone does not avoid probate.

You must take step two which is “funding” your trust while you’re still living. Funding simply means re-titling your assets to your trust prior to our death.

The first step is to determine which assets will go into whose trust (i.e. your trust and/or your spouse’s trust).  If your estate planning attorney is doing his/her job, they will spell this all out for you.

The next step is to change the title of ownership on each of your non-IRA assets, a bank account for example, to your trust so that your statement now reads “John Jones, Trustee, for the John Jones Revocable Trust” instead of just “John Jones”. 

Make sure you do this with all of your non-IRA assets so nothing gets left out. 

Additionally, your estate planning attorney should also spell out how your beneficiary designations should read on your life insurance, IRAs, and annuities. 

** A key point here is, if you are going to name your respective trust as your beneficiary, your trust MUST qualify for “pass-through” status so your trust beneficiaries have the opportunity to save thousands of dollars in income taxes by taking advantage of Inherited IRA rules.

While you’re completing the paperwork to re-title your assets to your respective trusts, take care of all your beneficiary designations at the same time. 

Download the PDF