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Dear Emmy, will I have to pay transfer taxes on the money I give towards my grandchildren’s college tuition?

In almost all cases: No. Many young people are trapped in a debt cycle that starts with student loan repayment. Helping a loved one pay for higher education is a generous, life affecting act and there are several paths to do so tax free. The most straight forward way is to simply write out a check directly to the university. And then another one to the student book store, her sorority, his haberdasher . . .
This could become a perilous road if expectations are not set beforehand. Another possible route is to make use of the $14,000 per year gift tax exemption. If your spouse is on board, then up to $28,000 could be gifted directly to the student. This would cover most college tuitions. For more expensive institutions, you can start a Section 529 college savings account in advance. The IRS allows you to place gifts into a 529 fund that can be removed with accrued interest tax free, but only for specific higher education expenses.
Do you have excess cash and are not one to plan ahead? How fortunate! You may put up to five years’ worth of annual gifts ($70,000) into a 529 plan in one year for the benefit of a specific person. However if you have the misfortune to die before those five years are up, part of that money may have to be returned to your estate and any interest earned could be subject to taxation. Also, if the prospective student decides not to attend college, that money can be used elsewhere but may be subject to taxes and penalties.
Please know that funds put into 529 accounts are not tax deductible. Although earnings from qualified withdrawals from these accounts are free from federal taxation, they may be subject to state taxes – but not in California.
Finally, grad students can borrow $20,500 a year from Uncle Sam at 6.8%. The Bank of Grandma can lend $10,000 or more if you charge the minimum IRS-set interest rate of 2.9% for a nine year loan*. Set interest rates are lower for shorter repayment terms. This option may instill a greater sense of financial responsibility in the receiver as opposed to a straight out gift. Please be sure to put the interest rate and the repayment terms in writing. This can help avoid future squabbles.
I will end this week’s column with my usual disclaimer: before making any important financial decisions, please speak to your Certified Financial Planner or qualified tax advisor.

* http://www.irs.gov/pub/irs-drop/rr-13-12.pdf
Securities and advisory services offered through NATIONAL PLANNING CORP (NPC) member FINRA, SIPC, a Registered Investment Adviser. EH Financial Group, Inc. and NPC are separate entities and unrelated companies.

An investor should consider the investment objectives, risks, changes and expenses associated with 529 plans before investing. Please read the official statement carefully before investing.

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