One of the biggest advantages to 529 plans is that under federal law contributions can total as high as the average cost of five years of education for the area of the schools that can be attended by the plan, says Parish. But one of the features of college savings plans is that donors can spread out the tax liability over five years, potentially avoiding any gift tax, explains Parish. This benefits grandparents who want to reduce their future estate tax liability without paying gift taxes. College savings plans also don't have adjusted gross income limitations. This makes them attractive to grandparents who couldn't otherwise use the tax advantages of education IRAs or savings bonds because their income is too high.
Control is another advantage.
Unlike custodial accounts such as UGMAs or direct gifts, control of the assets never pass to the student, even though the distributions for qualified expenses are taxed at the student's rate. Some investors may prefer the safety of pre-paid tuition plans, which guarantee that the investment will keep up with annual increases in tuition of the state's public colleges. One disadvantage of college savings plans is that they make the investment decisions, not you. Some plans are very conservative, others are not. Consequently, some grandparents may prefer simply investing on their own and donating the proceeds to their grandchild.