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Financially Speaking

Giving Money to Your Grandchildren

Tips for protecting your financial stability as you help others

All the states except Wyoming have 529s. To see what they offer and how good they are, go to savingforcollege.com. If there's no state tax deduction, or a low one, consider a low-cost plan from another state. Buy a "direct-sold plan" online, rather than a plan sold by a commission-based financial adviser. The states charge higher 529 program fees for adviser-sold plans, the advisers themselves put you into more expensive, actively managed mutual funds, and there may be sales commissions. A high total expense fee would be 1.5 percent a year and up. The lowest-cost plans that accept residents from other states — Virginia, New York, California and Ohio — mostly come in under 0.25 percent.

If you don't want to limit your giving to education, or don't care about tax breaks, you might simply set up a separate account marked "grandchildren," says planner George Middleton of Vancouver, Wash. You maintain control of the money and can dole it out at will.

Your grandchild can use 529 money for tuition and fees at any accredited school in the country, including community colleges, trade schools and professional schools. All 529 plans permit students to attend selected colleges abroad. If he or she decides not to start, or finish, school, or need all the money, you can transfer what's left in the plan to another family member, tax-free.

If you've been making regular year-end gifts to your adult children, they might not take kindly to your switching some of that money to the grandchildren. Your children might rely on those gifts to pay their property taxes, rather than saving in advance, says Houston planner Larry Maddox. That goes to my point about maintaining flexibility. It doesn't sit well for children to depend on your generosity for their style of life.

More grandparents are also leaving money directly to grandchildren in their wills, if they think the parents are living above their means. In Kansas, the thinking goes like this, says planner Randy Clayton of Topeka: "I want to be sure that my grandchild can get an education. If I leave all the money to my kids, I'm not sure my grandchildren will get anything, because the kids will spend it all." Besides, adds Middleton, mischievously, "Grandchildren are young and lovable with no apparent flaws — yet."

Consult your financial or tax adviser for advice regarding your personal situation.

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