$75K gift from grandparents

[Anonymous]

We just found out that my parents are giving our only child a $75K gift to be used for educational expenses. We're not quite sure how to accept the money given all of the tax consequences. We are thinking that buying a piece of investment property (a small condo or townhouse) using the rental income and the eventual sale of it for college. Any advice? Thoughts? We do intend on getting professional advice, but I'm interested in hearing ideas from people that have been in the same situation. TIA!

[Anonymous]

It's possible for each of your parents to give your child $60,000 without any gift tax consequences, if they file a form 709 to spread the lump sum over 5 years.

I'd probably put it in a 529, and if you are in DC or MD, I would probably put it in the prepaid tuition plan.

[Anonymous]

There shouldn't be any tax consequences for you, but I agree that it would be better for your parents to spread it out over a few years.

I would also recommend investing in a 529 plan or something similar. Sinking it into real estate just generates taxes and headaches for you; if it's for the child, start an account in the child's name and let it grow.

[Anonymous]

Depending on your income you could also look into a educational savings plan. You can use those for any expenses related to ed-not just college. I think they would have to put the money in to avoid taxes. It them gets taxed when you take it out I think-not sure. Plus, the rules keep changing with these things.

Otherwise I agree 529 is the way to go with them putting the money in instead of giving you the money to put in (I think). I am not a finanical expert, but I read a ton for our own investing.

[Anonymous]

OP here. Thanks, PP. Hadn't heard of the form 709. We're in VA. By the way, our child is 1 yr old.

[Anonymous]

It's more than $60K because of the increased annual exclusion amount, and that 5 year thing is applicable only in certain contexts. Talk to a tax planner.

529 plan may be your best bet, and more what your parents had in mind than an investment property (of all things!).

Prepaid tuition plan? Never.

[Anonymous]

Real estate is not considered a good investment. Don't do this.

Seek the help of a financial planner.

[Anonymous]

Each of grandma and grandpa can give each child $13K/year free of gift tax (annual exclusion amount). So that is $26K/year per child. If a 529 plan is involved, up to 5 years of gifts can be made at one time. TALK TO TAX PROFESSIONAL.

[Anonymous]

Thanks everyone for your thoughts/advice. We are definitely going to talk to a tax professional. The investment property thing was my parents' advice, actually. They have invested in many properties in the past and brought it up as an idea for the money as interest rates are very low right now and there are still some good deals out there. But, I hesitate because of the further tax headaches and issues dealing with tenants.

[Anonymous]

529 Plan.

[Anonymous]

Have them put it in a 529 account, such as VEST, which is in Virginia. You can choose how aggressively it's invested using their variety of funds.

There are estate and gift tax advantages to putting the gift directly into a 529 account:
http://www.savingforcollege.com/intro_to_529s/are-there-gift-and-estate-tax-benefits-for-529-plans.php

and tax advantages to investing the money through a 529:

http://www.virginia529.com/SavOptVESTTaxAdv.asp

If the grandparents live in Virginia, they can deduct the contributions (over time) from their Virginia taxable income.

Seek the help of a fee-only financial planner. Don't use one who will benefit from commissions from selling you some investment vehicle. Don't invest it in real estate.

[Anonymous]

Yes, I think the 5 year averaging for gift tax only works for gifts to 529 plans.

I think the prepaid plans can be a good option as long as they let you use the benefits at any college. MD's plan is good about that, but I don't know about VA's plan.

[Anonymous]

Your parents can each give each of you (you, your husband, your child) $13k/year without anyone paying taxes on it and without it counting towards the lifetime gift tax exclusion. Doing it that way would let you do the whole $75k in one year, and it doesn't matter if after you deposit the checks they all end up transferred to the same place.

[Anonymous]

Anonymous wrote:Your parents can each give each of you (you, your husband, your child) $13k/year without anyone paying taxes on it and without it counting towards the lifetime gift tax exclusion. Doing it that way would let you do the whole $75k in one year, and it doesn't matter if after you deposit the checks they all end up transferred to the same place.

My in-laws have done this from time to time as they have been dividing up my husband's grandparents' estates. This would definitely work if they want to unload it all this year; or they could do it in 13k increments over the next several years if they want it to go directly to the child without being in your name.

What a wonderful gift!

[Anonymous]

Financial planner here. Definitely the 529 plan. It is out of your estate and protected for the child's education. I would not tie a rental property up for education. What if the real estate market is in the toliet when it is time to pay the first tuition bill? At least with the 529 plan, you can shift from stocks to bonds to cash, depending on what the markets are doing. With a rental property, you are putting all your eggs in one asset class - real estate.