Planning for Your Children's Education

Education Funding Solutions

• §529 College Savings Plans
• Coverdell Education Savings Account
• Uniform Gift to Minors Act (UGMA)
• Uniform Transfers to Minors Act (UTMA)

Education Savings Plan Investment Options

§529 College Savings Plans ^[Top]

Named after the section of federal tax code that governs them, §529 College Savings Plans are a simple, tax-efficient means for meeting the expenses associated with an advanced degree.

Anyone can open an account, at any time, for the benefit of anyone they wish — a child, grandchild, relative, friend — even themselves! Control of the assets remains with the contributor, so the accumulated funds are sure to be used as the sponsor wishes. And, if the beneficiary chooses to forego college, the account owner may change beneficiaries^[1] or withdraw^[2] the assets.

Although the rules vary from state to state, contribution minimums are generally low, while the maximum amount allowed over the life of the account is quite sizeable — more than $300,000 per student under most plans. Earnings are treated tax-deferred until withdrawal. This way, taxes will not erode your account, allowing more of your savings to work for you over time. What’s more, when assets are withdrawn for qualified higher education expenses, the earnings are federal income tax-free!

The plans operate like a mutual fund in that returns fluctuate based on the performance of their underlying investments. Most plans offer a range of portfolios that include equity and fixed income investments.

Funds accumulated within a §529 plan can be used for tuition, fees, room and board, books, supplies and equipment necessary for enrollment and other qualified expenses at nearly every accredited U.S. institution of higher learning.

Benefits of §529 College Savings Plans

• Convenience and Flexibility – A §529 College Savings Plan account can be opened and funded at any time. The account can be started with an initial lump-sum contribution (modest or significant), and contributors can make regular or occasional contributions as they please. Anyone (parents, grandparents, friends, even the intended beneficiary) can establish a §529 account and anyone can contribute to the account once it is opened.
• Tax-deferred Treatment of Earnings and Tax-free Distributions
• Investment Choices – Choose from a selection of professionally managed portfolios offered by a variety of prominent mutual fund companies.
• Control of Assets – The account owner retains control of the assets and determines how the investment is used. The beneficiary can be changed* or assets can be withdrawn*.
• No Income Limits or Restrictions – Anyone, at any income level can establish or contribute to a §529 account.
• Low Minimum Investments
• High Contribution Limits
• Special Gift and Estate Tax Treatment * – Account owners can give up to five years of contributions (gifts of up to $65,000, $130,000 for married couples) in a single year to each beneficiary without gift tax consequences. Also, contributions are generally excluded from your taxable estate for federal estate tax purposes, provided you are not the beneficiary on the account. * 

For more information about §529 College Savings Plans, please visit the College Savings Plan Network savingforcollege.com.

[1] ^ The new beneficiary must be a member of the original beneficiary’s family. The beneficiary cannot be changed to the donor. There may be federal gift or generation skipping transfer tax consequences if the new beneficiary is a member of a lower generation than the original beneficiary.

[2] ^ Federal income tax on the earnings and a 10% penalty may apply.

[3] ^ Clifford & Rano Associates and Legend Equities Corporation do not render tax or legal advice. Consult your tax advisor or attorney for tax and legal advice specific to your situation.

[4] ^ Subject to an "add-back rule" in the event of your death within 5 years.

Section §529 plans offered are not FDIC insured; may lose value; are not bank guaranteed.  

Favorable state tax treatment may be limited to investments made in a §529 College Savings Plan offered by the customer’s home state. Customers should consult their tax advisor before investing.

Before investing in a §529 College Savings Plan, consider its investment objectives, risks, charges and expenses carefully. The official statement, which contains this and other information about the §529 plan, can be obtained by contacting Legend Equities Corporation. Please read the official statement carefully before you invest or send money.

Coverdell Education Savings Accounts ^[Top]

A Coverdell Education Savings Account (otherwise known as an Education IRA) is established by a “contributor” for a “designated beneficiary.” While the child is a minor, a responsible individual must be named (usually a parent or guardian) who makes investment decisions and authorizes distributions. Depending on the custodian’s plan document, the responsible person may retain control after the beneficiary attains the age of majority, the beneficiary may take control or the plan might offer a choice of these two options at the time the account is established.

Contributions are not tax deductible by the contributor. Contributions cannot be made after the designated beneficiary attains age 18. Contributions cannot exceed $2,000 per designated beneficiary for any taxable year. The maximum allowable contribution for a contributor is based on his or her filing status and modified adjusted gross income (AGI). The $2,000 maximum is phased out for single taxpayers with AGIs between $95,000 and $110,000 and for married taxpayers with AGIs between $190,000 and $220,000. If the contributor is an entity, there is no AGI limit.

Distributions for qualified education expenses are tax free. These expenses include certain elementary and secondary school expenses plus higher education expenses. Qualified education expenses are reduced by amounts provided by scholarships and educational assistance allowances. A taxpayer may exclude from income distributions on behalf of a student claiming a HOPE credit or Lifetime Learning credit for the same taxable year as long as the distribution is not used for the same education expenses as the credit.

If distributions are greater than the qualified education expenses for the year, a portion of the distribution can be included in the gross income of the beneficiary as determined under §72(b) of the Internal Revenue Code (general basis recovery rules). If any portion of a distribution can be included in income, a 10% additional penalty will apply to the taxable amount unless: 1) the distribution was made on account of the death of the designated beneficiary; 2) the distribution was attributable to the designated beneficiary becoming disabled within the meaning of §72(m)(7) of the Code; or 3) the distribution was made on account of the receipt of a scholarship, allowance or payment described in §25A(g)(2), and the distribution does not exceed the amount of such scholarship, allowance or payment.

Any balance remaining in a Coverdell Education Savings Account on the date the designated beneficiary attains age 30 must be distributed to the beneficiary or rolled over to an Education IRA of another family member (under the age of 30) of the original beneficiary within 30 days. This rule does not apply to special needs designated beneficiaries.

UGMA and UTMA Accounts ^[Top]

Under the uniform statutes, Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA), an individual can gift or transfer an asset to a child, setting up a custodial account to hold the asset. Any competent adult can act as custodian and it does not have to be the donor of the asset.

Differences

Mainly, the UTMA offers a bit more flexibility. UGMAs can hold only bank deposits, securities (including mutual funds) and insurance policies. UTMA rules allow gifting of virtually any kind of asset, including real estate. Also, UGMAs must be funded with gifts, while UTMAs can be funded with other types of transfers, including assets inherited. There is also a difference in the age of custodial account termination, depending on the state of residence.

Custodian Responsibilities

The custodian of a UGMA/UTMA has a legal fiduciary responsibility to handle the asset in a prudent manner. It is important to remember that the property in a UGMA or UTMA is owned by the child. A gift is legally complete when the cash or other property is transferred to the custodial account, not when the account terminates. The donor cannot change his mind and take it back.

Advantages

• his type of custodial account allows a minor to own securities or, in the case of UTMAs, other assets such as real estate.
• A UGMA’s or UTMA’s earnings are the child’s tax liability, not the custodian’s.

Disadvantages

• Child is owner of asset – The donor cannot legally take the gift back, even with the child’s consent because the child isn’t old enough to give a valid consent.
• Unified Gift and Estate Tax Credit – If the donor/custodian dies before the child reaches the specified age, the custodial account’s assets are included in the donor/custodian’s estate.
• Termination – When the child reaches the specified age, the custodian must turn the assets over to the child. Not doing so would also be a breach of the statutory trust terms and the custodian could be liable for sanctions from a court of law, if challenged on the delay.
• Kiddie Tax – Children under the age of 18 are now taxed at their parents’ top marginal rate, which eliminates most of the benefit from shifting income producing assets to children. After attaining age 18, a child is taxed at his or her own rate. (The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) changed the Kiddie Tax age from 14 to 18.)
• College Savings – Many donors are aghast when they realize how much having the asset in the child’s name affects eligibility for financial aid. Under current financial aid formulas, assets owned by a child count much more heavily than parental assets in determining qualification for aid. This is up to 35 percent now but is due to decrease to 20 percent for the 2007-2008 academic year, according to www.savingforcollege.com.
• Use of Assets – A custodian may use UGMA or UTMA assets for the benefit of the child. But, parents already have a legal obligation to support their children. These accounts should be used only for items that supplement the parental obligation – but this is a very gray area, with much dependent on the parents’ economic status and the applicable state’s laws.
• Death of Child – If the child dies before termination of the account, the assets will pass according to the intestacy laws in the applicable state.