As the cost of college rises, and careers become more high-tech, there’s a growing sense among many families with young children that the very thing their kids will need – college – is the very thing that’s becoming unattainable. There are horror stories about the debt loads that college graduates are carrying as they take their first steps into adult life, leaving many to wonder how to navigate this seeming financial crisis.
At the same time, the current generation of senior citizens are finding their account values growing, while simultaneously enjoying the benefits of pensions and Social Security. It’s also notable that the younger generations of workers are much less likely to have pensions than their parents and grandparents, creating a very unique transition occurring in our society and economy. In other words, those who have most of the money don’t often need all of it, while those who don’t have it will likely need a lot of it. This creates an opportunity for much discussion of what to do about it.
Buried within this discussion is the question of what is a parent or grandparent’s responsibility when it comes to paying for education? While there’s no single right answer here, and I’m very cautious to not judge others’ decisions in this area, there is an interesting example we can look to from the past. When we were more of an agrarian society, meaning our livelihoods were derived from farming, the inheritance one would offer their children would be that of farmland. After all, if that’s how a family would feed themselves, that’s the asset of value that would pass from one generation to the next. But last time I checked, I’m not a farmer, nor are most of you.
There’s an argument then that it’s ‘good’ to leave an inheritance to the next generation (in fact, the Bible speaks to this if you’re inclined to check it out), so what should a modern inheritance look like? Could it be that the modern-era inheritance isn’t generally a farm, but an education instead? After all, the vast majority of our children and grandchildren will not become farmers, but professionals in a trade or other skilled career. These skilled careers require vast amounts of education, so what better way to help support that livelihood than by providing some assistance toward a quality education, a modern inheritance?
If this resonates with you, then the next question may be, “What’s the best way to fund an education, either for children or grandchildren?”
There are many ways to provide education funding assistance, including, but not limited to:
- 529 College Savings Plans – These plans are similar to IRAs because of their tax benefits, but the purpose of the accounts is to fund higher education costs. When used for this purpose, gains in the account are tax-free, and the accounts can be transferred between children and grandchildren depending on who needs the money. On top of that, the person adding money to the account(s) may be eligible to receive a tax deduction on their state taxes (limits apply).
- Saving in a Roth IRA – Many people are unaware that savings in a Roth IRA can be used without penalty for payment of qualifying higher education costs. So while the original intention of the account may be retirement savings, a two-birds-one-stone approach allows the same money to be used for college expenses if needed.
- Establishing a ‘Family Legacy Plan’ – Some families may be able to create a substantial financial legacy for future generations of their family by way of properly structured life insurance. Yes, this strategy is a bit more morbid than the others, but it can work very well. In short, grandma and/or grandpa allow their insurability to be used by their children to buy life insurance on their lives, paid for by the children. When grandma and grandpa pass away, the life insurance policy pays a large, tax-free benefit to create an education-funding legacy for future students. Many institutions use this ‘endowment’ strategy, but it can be just as effective as a family arrangement.
- Outright gifts of cash – When college bills arrive, simply pay them outright rather than have the student incur debt. While this may seem obvious, the key to this is good communication. Rather than surprise a student, consider laying out a strategy with them. The lessons learned can be invaluable, and it may lead to different schooling choices than if there was no strategy in place.
- Establish a Minor’s Trust (section 2503(c) trust) – You may wish to establish a separate entity to hold gifts in trust for a child until he or she reaches age 21. The money in the trust can be used for the child before age 21, but should there still be money in the trust after the child reaches that age, the trust can stipulate how and when the money can be used for other purposes. It’s a strategy that would be established with the help of a qualified attorney.
Working with many families who have benefitted from and believe strongly in the value of higher education, there is often a strong desire to put some financial wind in the sails of the next generation. How to do that efficiently and effectively will look different for each family, but please know that there are many ways to plan for college or trade school expenses. Equally as important is ensuring that you’re in a solid financial position yourself before helping others…that requires a plan for yourself. Once you’re confident that your plan is in place, then the work can begin on planning for future generations, if you so choose.
Please let us know how we can help you better understand your options and how you might proceed. We may not all be farmers any longer, but we can do a lot of good by planting seeds for those we care about, allowing them to reap future harvests in these dynamic times.
All the best,
Adam Cufr, RICP®