If the grandparent is young and in good health and anticipates living for quite awhile longer, the grandparent may want to make sure that there are adequate funds available for retirement needs. Also, the grandparent wants to insure that the grandchildren will not grow up to be spendthrifts and waste the money intended for college. Additionally, the grandparent may not like the idea of trusts or custodial accounts to accumulate funds for the grandchildren's college educations. If a grandparent uses these types of vehicles to accumulate funds, the grandparent will lose control of the money and it will not be available for retirement needs, and the grandchildren may not utilize it for college. Because of the above concerns, funding grandchildren's college educations with a QTP may be the best option. The grandparent can establish an account for each grandchild and fund it with annual tax-free gifts, if the gift is less than the annual gift exclusion. The advantages of a QTP to fund a college education are:



1.The grandparent can withdraw the funds from the QTP if they should be needed for retirement.

2.The funds need not be distributed to a grandchild who might use the funds for non-college purposes.

3.If a grandchild falls from favor with the grandparent, the plan funds can be rolled over to another beneficiary.

4.The grandchildren will benefit from the deferral of income tax on the plan earnings.

Example: Grandpa and Grandma have a combined estate of $3 million, which they wish to reduce. Additionally, they also want to help fund the college educations of their two grandchildren. They both plan to contribute $100,000 to the QTPs for each of their two grandchildren and establish QTPs for both of the children's parents. Each grandparent plans to contribute $100,000 to both of the individual QTPs for the parents. After these plans have been established, the grandparents switch the beneficiaries of these QTPs from the parents to the grandchildren. This switch does not trigger a tax or penalty since the grandchildren are qualified beneficiaries of the parents. However, in order for the parents to avoid a gift-tax liability, they must elect to spread the gift over five years on their gift tax return.

If a grandparent's primary goal is to reduce an estate in the most tax-efficient manner possible, a QTP may not be the best option. If the grandparent anticipates being alive during the grandchildren's college years, the best way to reduce a grandparent's estate may be for the grandparent to make gifts directly to the grandchildren's colleges. In this situation, the grandparent will not waste the annual gift exclusion on gifts to a QTP. If part or all of the annual gift exclusion is used to offset gifts to a QTP, the grandparent is not reducing the estate in the most tax-efficient manner. The grandparent could make gifts directly to colleges and also make additional gifts that could be offset by the annual gift exclusion.

Copyright (c) 2009 Karen Bolton