Q.  My wife and I are considering annual gifts to our grandchildren to help with their future college expenses. Do you have any suggestions as to the best way to do this?

 A.  Yes. One of the best options is to make annual gifts into a 529 Education Savings Plan, so named for Section 529 of the Internal Revenue Code. A 529 Plan is an education savings plan operated by a state or educational institution, and is designed to help families set aside funds for future college expenses. The funds contributed to such accounts are usually invested in mutual funds and professionally managed to help pay for future college tuition, room and board, or other expenses. Contributing to a 529 plan is usually a better choice than making outright gifts to custodial accounts for your grandchildren, who would then have the legal right to demand the funds when they become adults regardless of whether they then used the funds as you intended.

Here is a list of some of the benefits in setting up and funding a 529 plan:  (1) you retain control and can decide when your grandchildren receive the funds; (2) in most plans, you can even reclaim the funds should you need them for yourself, such as for your own medical or care expenses; (3) the earnings on investments are income tax-free and distributions down the road for your grandchildren’s college costs come out federally tax-free; (4) your contributions reduce the size of your taxable estate; (5) enrollment is simple and plan assets are professionally managed; (6) the plans are flexible: you may change your investment option every year and you have the option, annually, to move your investments to a different state’s program if you feel it is performing better; (7) you can change beneficiaries at any time, so long as the new beneficiary is a member of the original beneficiary’s family; and (8) your  contributions usually do not affect eligibility for financial aid until funds are actually distributed, and then usually only in the following year; thus, if the 529 assets are only used for your grandchild’s last year of college, the distributions would not likely make any difference for financial aid purposes since he will by then have graduated.

However, since you do retain control and the right to reclaim your contributions, the funds in a 529 plan would count as a resource if you needed to apply for a Medi-Cal long-term care subsidy. However, creating a 529 plan has so many other favorable features, that it is well worth considering.

Nearly every state has at least one 529 plan, and you do not need to be a resident of the particular state in order to contribute to its 529 plan. An excellent resource for general information can be found at www.SavingForCollege.com. California’s 529 plan is called ScholarShare, managed by TIAA-CREF. You can create an account at the following site: www.ScholarShare.com or by calling 1-800-544-5248.