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Even in Tough Times, Grandparents Can Still Help Their Grandkids Get a Good Financial Start
Though grandparents are among the millions who have taken a
big hit to their portfolios in recent years, careful planning
can ensure a healthy contribution to the education and financial
future of their grandchildren.
The first step involves a talk between grandchildren and
their adult children. According to 2008 research from The
Hartford Financial Services Group, 65 percent of grandparents
surveyed reported that they plan to contribute financially to
their grandchildren's college education, but that less than one
third of all survey participants talked with their adult
children about those plans.
Statistics show the amount of money that changes hands
between grandparents and their grandchildren is substantial even
before the kids head off to college. Hartford reports that more
than 40 percent of grandparents spend more than $2,000 annually
on their grandchildren before they reach 18 years old. And once
it's time for the kids to head off to school, over half of
grandparents who plan to contribute will give more than $10,000,
with a quarter of those planning to give more than $30,000.
A visit to a CERTIFIED FINANCIAL PLANNER™ professional can
help grandparents and their adult children coordinate a gifting
strategy that makes sense. In the meantime, there are several
options to consider:
Talk. Adult children and their parents might find it
difficult to talk about money issues in general, but discussing
a positive goal like funding a child's future can pave the way
to make discussions later about the grandparents' estate issues
and end-of-life care a little easier to handle. But initially,
these discussions will hopefully deliver a reality check. The
Hartford survey points out that 60 percent of the grandparents
surveyed believe that financial aid will be the most likely way
their grandchildren will pay for college in an era where federal
aid is declining and grants and scholarships cover only an
estimated 15 percent of total college costs.
Start early. While many families don't turn to
relatives for help until there's an immediate need, earlier
planning almost always produces better results. Grandparents
already know that saving for a child's college education is
easier if it starts at birth. The same is true for the next
generation, so grandparents or adult children need to set a plan
in place as early as possible for maximum benefit.
Coordinate college support with overall estate planning.
Grandparents should look at their support for their adult
children and grandchildren as an overall part of their estate
strategy. A CFP® professional, in concert with estate and tax
experts, can help grandparents and their adult children settle a
series of estate issues at one time, saving time, money and
worry later.
Consider the 529 plan option. A 529 college savings
plan is an investment vehicle operated by a state or educational
institution designed to help families set aside funds for future
college costs. It is named after Section 529 of the Internal
Revenue Service Code, which created these plans in 1996. If
parents have set up a 529 plan for their child, grandparents can
contribute to that plan or they can set up their own 529 plan
account with their grandchild as the beneficiary.
Watch the fees. No matter what savings or investment
options you choose, make sure you're not overpaying fees. A
stock mutual fund may charge in excess of 1 percent of assets;
you can certainly find quality mutual funds that charge less.
Two good resources: Morningstar.com
can provide you a general review of most mutual funds you might
be considering. The second is the Security
and Exchange Commission's online Mutual Fund Cost Calculator
which can help you determine how the fees and other costs
associated with the fund will add up over time.
Offer some investing training wheels. Grandparents
have a unique relationship with their grandchildren. They can
teach without "lecturing" like their parents, and for
that reason, they might consider setting up an investment
account with a small balance that the kids can monitor and
discuss under the supervision of the grandparent.
Make the grandkids beneficiaries. Naming your
grandchild as the beneficiary of a retirement account or
insurance policy can be a tax-smart way to provide financial
support for college or possibly a first home.
October 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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