Giving college money to a neice

[nawhite]

I'd like to give somewhere on the order of $1000/year to my neice for college or other options if she decides not to go to college for whatever reason or gets full scholarships etc. I'd also like to not screw her over on financial aid calculations when she fills out her FAFSA.

Options that come to mind:
1) 529 Plan that I am the "owner" of with her listed as the beneficiary. I don't think these affect your federal income taxes, just state income taxes so it would only save us about $50/year in taxes while putting huge restrictions on the money of only being available for education related expenses.
2) Save separately in a vanguard account under my name and just give her all of it as a gift upon graduation. No tax benefits at all for either of us but also won't show up on FAFSA. We also don't know how to let her know about it without her name on it.
3) Gift directly to an account managed by her parents. This sounds strictly worse than #2 as there are no tax benefits AND it gets counted against her parents assets on FAFSA

Looking for creative ways people have set up things like this. What was your experience with different set ups either on the giving or receiving end?

[nereo]

You can gift (IIRC) up to $15,000/year to an individual without that individual having to pay taxes on that money.  You won't receive a tax break, but you need not worry that your niece will be hit with a tax bill, nor will it influence here FAFSA calculation (i.e. the "expected family contribution" or EFC).

A 529 allows for capitol gains on contributions to be tax-free IF used for a qualified purpose; depending on your timeframe and future tax status this may or may not matter to you. If college for your niece is just a few years away and you are considering giving just $4k then the CG taxes will likely be pretty minimal anyway.  If it's a decade+ in the future it could amount to several hundred$ in savings from avoid those LTCG taxes.

[Zamboni]

It is very kind of you to help your niece out. Approximately how old is she? That makes a difference in whether a 529 is even worth it . . .

If you go the 529 route, then she will need to be careful when it gets used. Funds from 529's that are not owned by parents are counted as "ability of the student to pay" funds the following year. "Ability of the student to pay" basically means that colleges will assume 100% of that amount of money is there again the following year, and that 100% of it will be used for college expenses the next year. Therefore, it would be best if she didn't used 529 funds from anyone other than parents until the last year she plans to attend college.

That is my understanding of it, anyway. Anyone else is welcome to correct me if I am wrong.

[GizmoTX]

We gifted a total of $20,000 to a niece, paid in increments of $2,500 by semester directly to her university. We stipulated that she had to maintain a 3.0/4.0 GPA to receive the next semester's payment.

Earlier we set up educational trusts for 2 nephews with $5,000 each & invested it in the Vanguard Total Stock Market Index fund. The trusts file a Form 1041 each year, but the index fund is very tax friendly. Nephew A went to college & the trust paid $20,000 of his expenses. Nephew B went a few semesters to community college & the trust paid his tuition, but since he has not graduated from college or trade school, he will receive the balance at age 30, which is now $30,000 minus capital gains tax on the appreciation.

We deliberately avoided UGMA (universal gift to minors) to retain control past age 18. 529s didn't exist when we set up the trusts but I wouldn't use them either because college is not a sure thing.
 

[secondcor521]

You can gift (IIRC) up to $15,000/year to an individual without that individual having to pay taxes on that money.  You won't receive a tax break, but you need not worry that your niece will be hit with a tax bill, nor will it influence here FAFSA calculation (i.e. the "expected family contribution" or EFC).

A gift to the niece would be required to be reported as tax-free income to the student on the following year's FAFSA and would, depending on the circumstances, adversely affect the family's EFC:

"Cash support to the student must be reported as untaxed income on the Fafsa. [...]  Cash support includes money, gifts and loans. It also includes food, clothing, housing, car payments, medical and dental care, insurance and college costs, as well as money paid to someone else on behalf of the student (i.e., money paid for expenses the student would otherwise be obligated to pay)."

https://thechoice.blogs.nytimes.com/2013/01/16/guidance-office-fafsa-3/

See also question 45j on the FAFSA here:  https://fafsa.ed.gov/fotw1819/pdf/PdfFafsa18-19.pdf

Student income is generally "taxed" by the FAFSA at 50%.  See line item 43 on page 10 of the FAFSA formulas here:  https://ifap.ed.gov/efcformulaguide/attachments/1920EFCFormulaGuide.pdf

[nawhite]

She's currently 1 year old so the money will have a long time to appreciate.

Sounds like the easy answer is just keep the account in my name with her as the beneficiary, then give her $15k/year starting in her last year of college. That way, yes long term capitol gains, and no tax benefits for me, but those benefits seem like they would be outweighed by the 50% FAFSA penalty if we gave it to her each year and it got counted as "income" or 20% penalty if we gave it to her earlier and it counted as her "asset" or 12% penalty if we gave it to her parents and it counted as their "asset".

[Annie101]

What about her parents setting up the 529 for her, and then you contribute to it.  This is what I did when my mom wanted to give each kid 10k.  It’s super easy to contribute to it.  I’m not an expert though.  Maybe this wasn’t best plan.  I think the money isn’t a huge penalty with financial aid?

[nereo]

What about her parents setting up the 529 for her, and then you contribute to it.  This is what I did when my mom wanted to give each kid 10k.  It’s super easy to contribute to it.  I’m not an expert though.  Maybe this wasn’t best plan.  I think the money isn’t a huge penalty with financial aid?

Technically speaking, anyone can open a 529 account for any US citizen, and an individual can have an unlimited number of accounts in his or her name.  So one does not need the parents to open an account.
The balance of all the 529 accounts not owned by the parents or child will not count against the expected family contribution (EFC) on their FAFSA score, but withdraws will be counted as taxable income for the student. Wether that amounts to any increased taxable burden will depend on the amounts, the standard deduction at the time and whether the student has any additional income.  In the majority of cases any taxes owed will on a college-aged student will be minimal..

[TVRodriguez]

Technically speaking, anyone can open a 529 account for any US citizen, and an individual can have an unlimited number of accounts in his or her name.  So one does not need the parents to open an account.

True.  I set up 529s for my nephews by myself.

withdraws will be counted as taxable income for the student.

I am pretty sure this is not correct.  The withdrawal for the student can be counted as an expected contribution towards the next year's tuition, though, which is why it's good to make the 529 distribution for the student in her last year of college.

You can gift (IIRC) up to $15,000/year to an individual without that individual having to pay taxes on that money.

This is not correct.  You can gift $15,000/year to an individual without the DONOR having to report that gift and count the excess over $15,000 against his lifetime federal transfer tax exemption amount.  But with the lifetime exemption currently at $11.4 million, the transfer tax affects very few people nowadays.

Also, there are no income taxes on gifts, and the donee is (almost) never going to have any transfer tax liability on a gift, either.  This has nothing to do with the question posed by OP, but I wanted to clarify that for anyone else reading this thread.


OP:  Since you don't want to require the money to go to education, the simplest method is to keep a separate account in your own name and give it to your niece when she is of an age that you believe appropriate.  Another method is to set up an irrevocable trust for her benefit and put the money in an account in the name of the trust.  As long as she has no rights to any of the trust principal or income (a fully discretionary trust, with the trustee having absolute control), the money should not be counted towards her expected contribution to schooling.  The trust terms can allow her demand rights at a later age or upon graduation from college (so she could pay off any loans if she actually graduates).  There are all sorts of caveats that you can include in a trust like this, but it's, I admit, not ideal.  And you can't make her parents the trustees, either.  This is, admittedly, more complex, but it ensures that she will get this money.  Or you could name her as a beneficiary under your own estate plan, just in case you don't survive until she reaches majority.

[reeshau]

Technically speaking, anyone can open a 529 account for any US citizen, and an individual can have an unlimited number of accounts in his or her name.  So one does not need the parents to open an account.

True.  I set up 529s for my nephews by myself.

One caution if you are doing this:  some states' rules on contribution limits apply to the total value of all 529 plans for a beneficiary; so make sure you share what you are doing with the parents.  (usually these values are very high:  $200k - $500k; but they are still there)