The New Inheritance Trend
As college costs continue to rise and the job market becomes increasingly tech-driven, many families with young children are feeling the weight of financial uncertainty. The very education their kids need to thrive appears to be slipping out of reach, with alarming stories of graduates burdened by hefty student loans as they embark on adulthood. This situation leaves parents and grandparents pondering how best to navigate this financial landscape.
At the same time, today’s seniors are witnessing their investments grow while benefiting from pensions and Social Security. In contrast, younger workers are less likely to enjoy the same pension benefits that their parents and grandparents had. This evolving dynamic presents a unique societal shift: those with significant financial resources often don’t need all of it, while those without are in desperate need of support. This discrepancy invites a critical conversation about financial responsibility across generations.
Central to this discussion is the question of how much responsibility parents and grandparents should take on when it comes to funding education. While there’s no one-size-fits-all answer, we can draw an interesting parallel from the past. In a time when agriculture was the backbone of society, families would pass down farmland as their primary inheritance—an essential asset for survival. Today, however, farming is far less common for most of us.
So, what does a modern inheritance look like? Rather than farmland, could it be education? The majority of our children and grandchildren are unlikely to follow in the footsteps of farmers; instead, they will pursue careers in various skilled professions that require substantial educational investment. In this context, supporting their educational endeavors could serve as a contemporary inheritance, equipping them for future success.
If this perspective resonates with you, the next logical question is: what are the best ways to fund an education for children or grandchildren?
There are several options to consider:
529 College Savings Plans – These accounts function similarly to IRAs and offer tax benefits specifically for education expenses. Funds grow tax-free when used for qualified education costs, and the accounts can be transferred between children or grandchildren as needed. Additionally, contributions may qualify for state tax deductions, although limits apply.
Roth IRAs – Many people are unaware that savings in a Roth IRA can be withdrawn without penalty for qualifying higher education expenses. While primarily intended for retirement, this dual-purpose approach allows funds to be utilized for college costs if necessary, and if not needed, the money in the Roth IRAs can serve as retirement assets for mom and dad.
Family Legacy Plans – Some families can establish a lasting financial legacy through properly structured life insurance. In this strategy, grandparents’ insurability is leveraged to purchase life insurance for their children, paid for by the children. Upon the grandparents’ passing, the policy pays out a substantial, tax-free benefit that can help fund education for future generations. This strategy mirrors the endowment approach used by many institutions but can be tailored for family use.
Direct Cash Gifts – When college bills arrive, covering them outright rather than allowing students to incur debt is another viable option. Communication is key here; instead of surprising your student, consider discussing the funding strategy in advance. This approach not only alleviates financial stress but can also lead to more informed educational choices.
Minor’s Trust (Section 2503(c) Trust) – Establishing a trust to hold gifts for a child until they reach adulthood can be another effective strategy. The funds can be accessed for the child’s benefit before age 21, and stipulations can be set for any remaining money afterward. This approach requires the guidance of a qualified attorney.
Many families genuinely value higher education and want to support the next generation in achieving their goals. The path to doing this will differ for each family, but there are numerous ways to plan for educational expenses. It’s equally important to ensure that you are in a strong financial position before assisting others, as having a solid plan for yourself is essential. Once you feel confident in your financial strategy, you can begin planning for the future of those you care about.
If you need guidance on your options, don’t hesitate to reach out. While we may not all be farmers any longer, we can certainly plant seeds for the next generation, helping them cultivate their futures in these ever-changing times.
