EDVEST 529 College Savings Update….Attention Grandparents

The Wisconsin Department of Revenue has recently ruled that although grandparents may claim a state tax deduction (not federal) on contributions up to $3,000 for a grandchild’s EdVest 529 College Savings Account, they can only claim the deduction if they are deemed owner of the account.

Prior to this update grandparents were eligible to claim a deduction but there was no specific language that stated they must be the account owner in order to do so.

 Typically parents will be listed as the owner of the 529 Account with the child listed as beneficiary.  Some thoughts of having the grandparent listed as account owner:

 Financial Aid Considerations

 Parental assets are assessed at a maximum 5.64% rate in determining the Expected Family Contribution (EFC).  Students assets are assessed at 20%, which is why parents are advised to keep assets out of the child’s whenever possible for financial aid purposes.  A 529 Account owned by a grandparent with the grandchild listed as beneficiary would not have to be included as an asset for the parent or grandchild on the FAFSA (Free Application for Federal Student Aid).  This is a known loophole that was combated with the College Cost Reduction and Access Act of 2007.

 Control Issues

 Although 529 Savings Accounts receive favorable tax treatment if the proceeds are used for higher education expenses, they are still controlled by the owner.  There is nothing to stop an account owner to use the money for themselves if they are willing to pay the taxes and penalties.  A sound strategy would be for parents to own the account for their own contributions and the grandparents own another account for the contributions they make.

 Estate/Gift Tax Planning

 Even though a 529 Account that is technically owned by a grandparent, it can be removed from their estate for tax planning purposes.  A grandparent will want to pay close attention to the amounts contributed in consideration of gift tax rules.  Read more here.

 Amount of the deduction

 A couple filing jointly making $80,000 would have an effective Wisconsin State Income Tax rate of 6.12%.  A $3,000 deduction would save that tax payer just over $180.

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