Financial Planner for Physicians Q&A | Where to put college savings for the grandkids?

Question:

"My dad passed away recently. He left some money for my mom (who is in an assisted living center) and she wants to put away some money for college for my two kids and her other grandchildren. She’s thinking about $12,000 per grandchild (up to two children per family).

In this situation, what is the best way to handle the money? I don’t have a lot of experience in investing, and I was just considering CD's or something like that but I thought I’d ask you first.

So, what do you think?”

Answer:

Your mom's well-being is the most important issue here, so I am going to assume that she has all the money she will ever need to pay for her cost of living and care for the rest of her life, and that whatever money she would give away is absolutely unneeded. If that's not the case, stop right here and look into her financial plan. Otherwise, here are some thoughts.

College Financial Planning for Physicians with Young Children

There are two things you need to think about when doing the financial planning for college:

  1.  Time Horizon: I assume your kids are young (since most of the financial planning for physicians we handle is for young physicians with young kids). That means you have a looooooong time before you’ll need to spend the money.
  2. Inflation: College costs have been rising at about 7% per year which is more than twice the inflation rate for other goods. At the same time, rates on certificates of deposit are near all-time lows, and pay even less than the inflation rate.

While the certificates of deposit (CD’s) are “safe,” you run the risk that your college fund won’t keep up with the cost of college, so they’re not a good match for the college goal.

To help your college fund keep up with the rising cost of college, you’ll need to invest it.

Financial Planner for Physicians: Section 529’s A Perfect Fit

As a financial planner for physicians, I’ve seen situations like this before and I believe a Section 529 College Savings Plan is a perfect fit.

  1. Estate Tax Benefits: Section 529 college savings plans allow grandparents to make a gift to a child which can be used for qualified higher education expenses (QHEE). It's a "completed gift" so that the money leaves the gift-giver's estate (your mom's estate).
  2. Parental Controls: At the same time, you as a parent, retain control of the money. Your child cannot reach the money, so they won’t be using it to buy a bright red sports car.
  3. Right Amount: The amount of money your mom wants to give is slightly less than the annual gift tax exclusion amount of $13,000 for 2012.

One important tip: If you go with a Section 529 college savings plan, make the contribution directly from your mom's account to the plan by check. If you forget to do this (and you make the parents the payee), you’ll lose some of the estate tax benefit. Check with your tax advisor for all the details about how to make this move.