10/29/2012

Funding College with Gifts: An Overview of the Available Programs

In a recent edition of the Washington Post, financial columnist Michelle Singletary commented on the cost of college and graduate education and the increasing amount of debt that US students are taking on. Citing the Council of Graduate Schools, she reported that "...many graduates are already entering the workforce saddled with debt that exceeds their annual salaries...”.

There are several ways to use a gifting program to help a prospective student fund the cost of higher education, such as 529 Savings Plans, Prepaid Tuition Plans, Coverdell Education Savings Accounts, Uniform Transfers to Minors Act and KISStrusts®

529 Savings Plans  While 529 plans are subject to stock market fluctuations, they can be an effective way to provide tuition money, especially if you choose your plan carefully and start early.  529 plans can be taken out in the parent’s name, rather than the student’s, so they will only minimally affect a student’s financial aid eligibility. Contribution limits are high, with no limitations based on income, minimum contribution requirements tend to be low, and many states offer a variety of tax incentives for residents who contribute to their plans. As an added bonus, many 529 plans can accept contributions from anybody anywhere, not just the people named on the account.

Prepaid Tuition Savings Plans  If market fluctuations deter you from putting a gift into a 529 plan, there is another state-sponsored way to provide for college costs.  A different type of 529 exists in many states. Prepaid tuition plans allow families to contribute a fixed amount now in exchange for a certain portion of tuition being covered in the future. Several states do this for their state colleges and universities, and the Independent 529 plan, which is accepted by over 200 private colleges, also fixes contributions to portions of future tuition.

Coverdell ESA  Coverdell Education Savings Accounts are similar to 529 plans, but are not state-sponsored.  They are sold by banks and brokerage firms, and there are management fees.  There is also no state tax deduction allowed for contributing to a Coverdell ESA.  A major limitation to the Coverdell ESA is the $2,000 annual contribution cap. This is the limit per account holder, not per contributor.  Additionally, individuals must have an adjusted gross income of $110,000 or below to contribute, and $95,000 or below to contribute the full $2,000. Coverdell accounts are held in the beneficiary’s name, so they will be counted as spendable assets when the beneficiary applies for financial aid.

UTMA  The Uniform Transfer to Minors Act allows assets to be given as gifts to minors without the establishment of a trust. While the options explored up to this point have been savings accounts or investments, UTMA covers everything, including property. An adult manages these assets in a custodial account until the owner reaches the age of 18 or 21, depending on the state. In the meantime, the funds in the account can be used to benefit the child, including taking care of educational expenses. Once the owner reaches the age of majority, the assets are his.  This may be to pay college tuition or buy that fast sports car!  The assets belong to the student, and are counted when calculating eligibility for financial aid.

KISStrusts   These trusts are in the realm of do-it-yourself estate planning documents.  They are a creation of Eastern Point Trust Company, a non-custodial company based in Virginia. The trust company appears to cultivate affiliations with financial planners who then recommend the KISStrust to existing clients.  The financial planners are given instructions on how to use online software to draft the trust for their clients.  The trusts are marketed as the way for people of modest means to establish a college trust fund for children and grandchildren, or to fund the purchase of a first home, without the expense (or expertise) of an attorney.  A similar product by the same company is marketed as a QuickTrust.   Estate planning attorneys are wary of non-attorneys who prepare legal documents while claiming they are not providing a legal service. 

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