One important part of estate planning is helping your children and grandchildren with the ever-escalating costs of their education. If they are already in school, you can do this by writing a check for their tuition directly to their educational institution. For younger children or grandchildren who are not yet enrolled, you may wish to delay giving them these funds until it is time for them to pay for college tuition costs. In this case, you have a few options, including making a gift into a custody account or into a trust that qualifies as a current gift under the Uniform Gifts to Minor’s Act. You can also choose to fund a Qualified Tuition Plan under IRC Section 529.
The two types of 529 programs are prepaid plans and savings plans. Unlike a Uniform Gift to Minors Act plan, the earnings on the assets in a 529 plan aren’t taxed until the funds are distributed, and distributions are tax-free up to the amount of the student’s qualified higher education expenses (defined below).
Prepaid Programs: Certain colleges make it possible for you to buy tuition credits or certificates at current tuition rates, even though the beneficiary (child) is not yet starting classes, locking in today’s rate for tomorrow’s education. Through this program, if a child is accepted into college and will start next year, you can purchase tuition credit for all four years at the current year’s rate. This can save a lot of money if tuition costs are rising quickly but isn’t a good option if tuition costs are declining.