Bypassing Your Child in Estate Planning?

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Elder Law Attorneys, John and Lisa discuss skipping your child in your estate plan and naming your grandchildren instead.

Lisa

Welcome everyone to Aging Insight. I'm Lisa Shoalmire, and I'm here with John Ross. That's right. And we are elder law attorneys, which means that we address issues that are of particular interest to our seniors and retirees, or frankly those who hope to be seniors or retirees someday. You know, the issues we cover involve everything from finances, housing, legal issues, and, you know, every now and then, we even talk about a little intersection where the medical comes in.

John

That's right.

Lisa

We have to watch that though. But anyway, this program is to bring you information in the comfort of your home so that you can be better informed and have the tools that you need to age in place and to do it wisely.

John

Well, you know, Lisa, the other day, I visited with a client and he was kind of in a conundrum because he's actually thinking about bypassing a child altogether in his estate planning. Just skipping the child altogether and going straight to the kid.

Lisa

Going straight to?

John

To the grandchild, sorry.

Lisa

Okay, grandchild.

John

Straight to the grandchild. And the reason is, is because the child has so much student loan debt. And when I say so much, I'm talking $500,000, $600,000 in student loan debt. And basically, his concern is, well, you know, she'll probably never be able to pay all that off. So, you know, maybe we just need to go straight to the grandkid, that way, it doesn't get, you know, offset because, you know, unpaid student loan, they can get to tax refunds, they can get to inheritances, they can get to all kinds of stuff.

Lisa

Yeah, that's true.

John

They've got almost the same collection power that the IRS does. And so, you know, that was concerning, right? And I think this, you know, you see so much stuff in the news about how expensive college has become, the student loan debt load that so many young people are taking on. And yet, I think particularly the older generations, they see the value in that college education.

Lisa

Right. So grandma and grandpa all are…you know, they are cheerleading for that college education in a lot of cases. And they may be in a position to help a grandchild obtain that college education. And, you know, so often, when you're parenting, there's so many things you're trying to do with your funds, save for retirement, you know, pay off on the car note, etc., etc. But sometimes, our retirees, they have their savings, their expenditures are low, and they feel like, "Hey, one of the best things I can do is help setup my grandchildren for a good future by helping them with their education." And so today on Aging Insight, we're gonna talk about grandparents or the older generation, some of the different aspects of assisting grandchildren with college educations.

John

That's right. So both while you're alive and you're wanting to help those college-age grandkids or possibly great grandkids, or if you're planning for it at death, in both cases, there's some right ways and some wrong ways to do it. And so that's what we're gonna kinda talk about. And we start with while you're alive.

Lisa

Right. So if you wanna help a grandchild while you're alive. You know, when a grandchild is born, I have seen a number of grandparents run out on the advice of their financial advisors and set up college funds particularly something called a 529 college fund. And this is a fund where you can invest your money and it can grow tax-free. And then if you later use those funds for qualifying education expenses, then there's still no income tax on the growth of those funds. Now, 529 plan's something that your financial advisor does. But John, I guess the question is, is that the first thing a grandparent should do is run out and set up a 529 college plan?

John

Well, the question there is maybe but it's based on how it's set up. You know, if you're pretty sure, you know, that these kids, yeah, you know, you're hopeful, you want them to go to college, and of course, you gotta understand, is yes, you get that tax-free growth, but that's only assuming that the money's gonna come out and go directly for college-related expenses. If you pull it out for other things, then you do pay tax on all of that. But the access to a 529 college savings account, that can impact that college student's eligibility for other financial aid.

Lisa

Right. So, you know, that's a big part of going to college is students who are applying to go fulltime to college, they must complete something called a Free Application for Federal Student Aid.

John

The FAFSA.

Lisa

Yes, the FAFSA is what it's called. And every student who is going to school must complete one of these to determine eligibility for what I call free money grants.

John

Right. Things like the Pell Grants. And many states have their own financial need-based non-repayment type stuff.

Lisa

Right. Not student loan.

John

Not student.

Lisa

So that's the best kind of college money. But before you can be evaluated for that as a student, you must file this FAFSA form. And, you know, when that student completes a FAFSA form, that student must list their own savings, they have to include their own income information if they've worked, you know, a fast-food job or something like that. And the form also requires that the student list, if he or she has any 529 college funds, which the student is the beneficiary of. And John, right now, we're just talking about the student's information that has to be included on that FAFSA. And, you know, how is that 529 college fund going to be looked at?

John

Well, yeah. So generally, this is going to be treated as either the child's asset or potentially the parent's asset if the parent is the custodian of that 529 account. So if the child has direct access to it, so if they're in charge of it, if the parent has access to it because they're the custodian of it, then this is going to negatively affect their eligibility for financial aid. So although, you know, you might think, "Well, look, my financial advisor's telling me all these great tax benefits of setting up this 529 account," you could easily offset all of those tax benefits that you got for that whole 18 years strictly because of the loss of things like Pell Grants because of the existence of that 529. It would be a whole lot simpler if you, as the grandparent, just took that money and put it in a separate account.

Lisa

Right, put it in a separate account with your name on it where in your mind, you're like, you know, "This is, you know, little Caitlyn's college find. And I'm gonna put some money over here," and maybe you invest it and maybe you...it's a CD, whatever. But the monies themselves are in your name as the grandparent, they are not in the student's name. So 18 years forward, when that student is completing their FAFSA application, when that question comes up, you know, has anyone set up a 529 plan of which you are the beneficiary? You get to check the box no, which means that that grandma savings that she has back for that student that's in grandma's name does not count against the student when it comes to receiving grants.

John

That's right. And pulling money out of that can be a little tricky too. But we gotta take a quick break. And so stick around. We'll be right back.

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John

Welcome back to Aging Insight everybody. I'm John Ross, here with Lisa Shoalmire. And today, we're talking about grandparents and taking care of those grandkids particularly when it relates to their college. And right before the break, we were talking about, frankly, if you're the grandparent and you're talking about setting aside some money, although there are some tax benefits to using something like a 529, the effect on the child's eligibility for student aid like Pell Grants can be negatively affected by those. So frankly, you're often much better off just setting that aside in a separate account that remains in you, the grandparent's name.

Lisa

Okay, I'm waiting.

John

That's right. So when it comes to that FAFSA, they look at what they call the year prior to the year prior. So when they're looking at the child's income, they're looking at the child's income not from the year they're going to school, but the prior year, prior year, right? So for somebody that's going in for the 2018-2019 school year, they're not looking at the 2017-2018, they're looking all the way back to 2016-2017. So the year prior to the year prior. So think of it this way. If you're the grandparent and you know that paying for some of that college is gonna negatively affect the child, here's what you do, it's real simple. You don't pay for the first two years.

Lisa

All right. We have some experience in this area.

John

We might. Hey, give them that first year to see if they're gonna make it, you know? No sense throwing good money after bad, right? Hey, let them figure it out, let them go and pay for it in some way shape or form. Even if that means taking out some student loans because if you're willing to pay for it, you can always give them money to pay those student loans off even before they graduate.

Lisa

Yeah. And John, the other thing I like about a grandparent keeping the money in their name, and then later on giving it to the child to pay for college is, you know, we don't really know when a young child is gonna be college material or not. And, you know, that way, we're not already committed to a college-type fund. And it's just a little more flexible.

John

Yeah. And as far as that goes, and maybe this is just a little bit, you know, a little more of my personal bent on some of these sort of things. College is very, very expensive and it's getting more and more expensive. And the economic prospects for college graduates is nothing compared to what it was decades ago. If you're that grandparent, you're thinking about the value of a college education being what it was when you were college age, that has changed. So many people now have college educations that it's lost a lot of its value. On top of that, you have many students who want to go to a prestige school, often private school, often double, or triple, or quadruple the cost of a comparable state school, but yet, are not getting degrees in things that compare to the cost of that school.

Lisa

Right. You know, and frankly, John, I went to a private university for law school. I paid very handsomely for that education. You went to a public university for law school.

John

I went to a state school for law school. And I got out basically debt-free.

Lisa

Right. And it took me quite a few years to pay off those student loans. So many students and families, they get so caught up, I think, in the prestige factor with certain schools or maybe a family history of attending that school that they don't look at the cost benefit of the…you know, cost of tuition over the four years of that education. And what's the benefit, John? The benefit is a degree you can get a job with. You know, my favorite example, if you're gonna be a second grade teacher, whether you go to a prestigious private school or, you know, a regional public university, your pay is probably gonna be about the same when you get on with the school district to teach second grade.

John

That's right. And so here is where you get to come in as the wise elder to say, "You know what? I'm willing to help pay, but you're gonna have to be a good steward of my money and that means either, you know, majors that have high economic output when they graduate, good job prospects," things like that. And also being reasonable when it comes to the choice of school and the cost of those tuition. And, you know, as I have often told my own children, I do the paying so I do the saying, right?

Lisa

Right.

John

And if you're doing the paying, you do the saying. And so don't get caught up in thinking that, "Well, yeah, it's just outrageously expensive." Yeah, it is but there are ways to control cost in all of this.

John

Right. So, all right. Well, I guess we'll take a little break. And we will come back and talk about some of the student loan issues that we have seen grandparents get caught up in. And we want you to avoid that. So stick with us.

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Lisa

Welcome back everyone to Aging Insight. I'm Lisa Shoalmire, here with John Ross. Today we're talking about the topic of grandparents assisting grandchildren or other family members with the cost of college education. You know, John, this is typically something that grandparents get on board with, you know, education.

John

That's right.

Lisa

So, you know, we've talked about, you know, being wise about how you save money and title money that you might be saving for an education for someone else. But John, there's this big financing monster out there for college education and that's student loans. And, you know, so, John, there are student loans that the student can sign for and get. And then there are student loans that are requiring a parent or some other more mature adult to sign on for the student's behalf. The second type of loans are called parent plus loans. And whether you are a parent or a grandparent, this is a type of loan that you could sign for so that your student can get this type of financing to pay for their tuition.

John

It's serious because think about it this way, Lisa. If I punch you, and you sue me, and get a judgment, can you get my Social Security?

Lisa

No.

John

If I loan you some money, or if you loan me some money and I don't pay you, can you get my Social Security?

Lisa

Nope.

John

I get into a car wreck with you and you get a big judgment, can you get my Social Security?

Lisa

No.

John

If I'm cosigned on my grandkid's student loan and they don't pay it, can the student loan get my Social Security?

Lisa

Yes.

John

Yes, they can.

Lisa

Student loan companies can come in and get a chunk of your Social Security. Now, they can't take it all. But, John, the last time I checked, most everybody I know who receives a Social Security check thinks it's pretty low.

John

Right. They're not looking for it to get smaller.

Lisa

Right. If the student loan company can only get 25% of it, well, that's 25% of your Social Security that you don't have to spend anymore. So it is a very big deal to sign on to a student loan. And I don't care how earnest your grandchild or student in your family is that they're gonna pay this back, you know, things happen. And sometimes, there are things that are just completely out of that student's control: accidents, disabilities, it doesn't matter when it comes to repayment. You have signed on the loan and you are responsible for repayment. And so, John, our advice to grandparents who are being asked to sign off on these type loans is just say no. Absolutely don't do it. And if your student is begging you and pressuring you to do it, you just need to tell them that those lawyers on TV told you not to.

John

And think of it this way, if you've got the money and you can afford to just pay for the tuition, or the books, or the meal plan, or whatever it is, then frankly just pay for it. There's no reason to sign and guarantee the student loan, right? So if you've got the money and you're willing to pay for it, then just pay for it. You can trick yourself by telling the student that it's a loan and they can...

Lisa

And they can pay you back.

John

...they can pay you back. But we all know, that's not gonna happen. But if you want to pay it and you've got the money to pay it, then just pay it. If you don't have the money, if you think, "Yeah, but I don't have the money, that's why I'm gonna guarantee." No, you don't sign up for a loan if you can't afford to pay back the loan, right? So there's no good reason to sign as a guarantor on that student loan. I don't care.

Lisa

Okay. So, well, John, I wanna address a couple of questions that I've heard from clients. I've had a couple of clients come in and say they wanna set up a trust in order to put money into the trust, so that way, that trust can pay their student's college tuition.

John

Right. And this is okay if you're talking about something that would be created in the event of your debt. And in fact, planning for minor children particularly and even when they're 18, they're still morons. So, you know, we can still...

Lisa

Not minors but morons.

John

Yeah, they've gone from minor to moron. They haven't gotten to adult yet, that comes later. And so, yeah, saying, you know, "I leave some portion of my estate, some dollar figure, whatever it is, but I want it held in trust for the benefit of little Timmy," that's fine, that's good. Now, this does take some very specific planning. You need to make sure you've got somebody who's in charge of this.

Lisa

Yeah. Who's gonna outlive you, and survive you, and can be there when little Timmy is getting ready to go to school.

John

And who won't spend it on themselves for Timothy's benefit, you know, or for their benefit. The other thing is, is you've got to think through the contingencies, right? What if little Timmy, what if at 16 years old, he developed some monumental computer technology, and he's the CEO of a million-dollar company before his 18th birthday? So, you know, much like Bill Gates, Steve Jobs, why even bother going to college?

John

Right. So now, what are we gonna do with the money? Do you have a back-up plan or, you know, when I've talked the same thing, if your student is a gifted musician or wants to be a missionary that…you know, there's lots of callings that don't end up with a college degree. So, you know, don't get super-focused on just using these funds for a college education. Make sure that there's some flexibility for the use of those funds in your trust.

John

Right. And think about the bad things that could happen. What if the child has a catastrophic injury? What if there's medical expenses or other personal needs unrelated to college, that in some cases, really could mean life, or death, or at very minimum, quality of life for that catastrophically injured grandchild. So you wanna build in some flexibility of these. This is where having some really good advice from really experienced people in the drafting of those type of trusts, you know? So you can do it. Just get it done right. And of course, you're already on the road to doing everything right, because you're watching this show.

Lisa

Right. So we've come to the end of our show today about college financing for grandchildren or greatgrandchildren. Hope you picked up a little nugget of information today. And hope you'll be here next time for our next edition of Aging Insight.

John

We'll see you then.

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