Grandparents, Tuition and Taxes

My parents want to contribute to our children's college costs. What is the best way to do this without our children or ourselves being taxed on the money given? Should the grandparents set up some kind of trust or money-market account for each child or buy bonds in our name to use for tuition?

--A Parent Soup member

Bruce Hammond

Bruce Hammond is an expert on college prep, applications and cost, and author of Discounts and Deals at the Nation's 360 Best Colleges and... Read more

One issue is whether your family hopes to qualify for need-based financial aid. If the family's income makes such aid unlikely, the best way to avoid taxes is to save money in the student's name via a custodial account or a trust. Unfortunately, that strategy backfires when the time comes to apply for need-based financial aid, because the formula assumes that students should make a much bigger contribution from assets in their own name than parents should from theirs. So parents should generally save in their names.

What kind of account may depend on how much time you have until college. With more than five years to go, parents should seriously consider stock mutual funds. If only a couple of years remain before college, however, money-market funds, bonds or certificates of deposit are probably a better bet.

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