Contributions to a 529 Plan by grandparents can be a win for everyone – kids have additional funds for college and grandparents may get tax benefits. But be careful; there is more to it than just contributing.  Do you know if contributions count as a gift or if the grandchild is a “skip person” or if it can hurt financial aid eligibility?  These are important questions to get answered.

Contributing to a 529 Plan with Grandchild as Beneficiary

Contributions to a 529 plan are considered a gift to the beneficiary and individuals can gift $15,000 annually ($30,000 if married) to the 529 gift-tax free based on 2021 annual exclusion amounts.  The contributor even has the option to front-load the 529 plan with five-years’ worth of gifts ($75,000 individual and $150,000 for couples) in a single year without incurring gift tax consequences. However, you cannot make any additional gifts to the beneficiary over that five-year time period.

Taxpayers who take advantage of the five-year gifting option, must report one-fifth of the total 529 contribution for each of the five years.  If the contributor dies within that five-year time frame, the pro-rata amount is included in the deceased’s estate. 

For Indiana residents who want to take advantage of the 20% state tax credit, you need to take that into account when front loading a 529 plan – you can’t spread the tax credit over the five years.  In order to receive the $1,000 tax credit each year, you should contribute $55,000 in year one and $5,000 in years two through five.

Generation Skipping Transfer Tax and 529 Plans

The generation-skipping transfer (GST) tax is a federal tax that is applied when property is transferred via gift or inheritance to a beneficiary who is at least 37½ years younger than the donor. Gifts, such as 529 contributions, made to a “skip person” (i.e., grandchild) are subject to a flat 40% GST tax in addition to gift taxes. Just remember that the annual GST amount is the same as the aforementioned annual exclusion amount of $15,000 per beneficiary ($30,000 if married).

Most taxpayers will not have to pay the GST tax because the exemption amount mirrors the lifetime exemption amount for gift and estate taxes, which is $11.7 million ($23.4 million if married) in 2021.  However, if you contribute more than $15,000 to a grandchild’s 529 plan in a given year, the excess amount must be reported on IRS Form 709.

Changing the Beneficiary of Current 529 to a Grandchild

Perhaps you are the owner of a 529 plan with your child as the beneficiary and funds remain in the account after completing their higher education.  Maybe you are continuing to contribute to the 529 plan in order to receive the Indiana state tax credit and you do not even have a grandchild yet!  Not a bad strategy, but what happens when you have a grandchild and it’s time to change the beneficiary from your child to your grandchild or “skip person”?  Once again, the amount in the account is considered a gift.  You have gifted this money to your child, but now the gift is being transferred to the grandchild.

If the balance is over the $15,000 annual exclusion amount, you can take advantage of the 529 five-year gifting option which is $75,000 for individuals and $150,000 for couple.  Just remember that any additional gifts made in those five years, must be reported on IRS Form 709.  Moreover, if the 529 Plan is over the five-year funded amount, you must report the excess funds on IRS Form 709.

Grandparent Owned 529 Plans and Financial Aid

Grandparent owned 529 plans are a blessing when it comes to paying for college expenses, but they could be a curse when it comes to financial aid.  When a parent owns the 529, up to 5.64% of the account value is included on the FAFSA, but distributions from the account are not counted.  None of the account value is included for grandparent owned 529 plans; however, under current rules, distributions from these accounts are counted as income and can reduce financial aid eligibility by up to 50%.

The good news is that when the new FAFSA takes effect on October 1, 2022, students will not be required to report cash support – or income from grandparent owned 529 plans.  A student’s reported income will come directly from the IRS on what is reported on the federal income tax return.  It’s important to note the CSS Profile, which is a financial aid form used by many private schools, has yet to update its rules.


Helping a grandchild with their college expenses is a wonderful gift to provide.  Just make sure that you are aware of the rules and regulations before you make that contribution or take that distribution.

Meredith Carbrey is a Senior Wealth Advisor with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at or email Meredith at

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