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Go with a 529 college-savings plan. "It's one of the most tax-favored, senior-friendly vehicles I know," says Bob Baldwin, a CPA and financial adviser in Charleston, S.C. "You can give assets away and still keep them. You can shelter them and not pay taxes."
Money in a 529 account can be used tax-free for college expenses, and your contributions are tax-deductible in about half the states. For grandparents, using a 529 plan is also an effective way to transfer substantial assets from your estate without worrying about gift taxes.
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Generally, you can give an individual up to $12,000 in 2006 without being subject to the gift tax. But in the case of a 529 plan, you can make five years' worth of contributions in a single year -- totaling $60,000 per person in 2006 -- without worrying about gift taxes (you might want to spread out your contributions if your state limits the amount you can deduct each year).
Even though the assets are removed from your estate, you can maintain control over them. For example, if one grandchild doesn't go to college, you can designate another one as beneficiary. Or you can take back the money entirely, if you pay a 10% penalty and taxes on any gains.
As a bonus, money in a grandparent-owned 529 plan generally isn't included as an asset on financial-aid forms, says Joe Hurley, of Savingforcollege.com. "Grandparents and 529s are made for each other," he says.
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