Many families cite saving for children’s or grandchildren’s education as one of their top financial goals. If you are among this group, you may want to consider a 529 college savings plan or a Uniform Gifts (or Transfers) to Minors Act account (UGMA or UTMA) — or some combination of these — to help you achieve your objective.
Estate Planning Benefits
A 529 college savings plan offer severals key advantages. You maintain control of the investment, the money is removed from your taxable estate and there are no annual contribution limits — although contributions in excess of $14,000 a year ($28,000 if a spouse joins in the gift) are generally subject to the federal gift tax. There is one exception: You may contribute five years’ worth of gifts all at once, or $70,000 per beneficiary, providing you do not provide additional gifts to the same beneficiary during the remainder of the five-year period.1 Distributions for qualified education expenses are tax-free, and you may change the beneficiary to another qualified family member within certain guidelines.2
A 529 plan is designed to finance higher education, such as college or graduate school.
A Matter of Trust
If you are comfortable having the beneficiary control the investment, you may want to consider an UGMA or UTMA account, an irrevocable trust managed for the benefit of a minor. The account legally belongs to the minor, but the trustee controls it until the minor is age 18 or 21, depending on the state where the minor lives. Assets may be used for any purpose — including education — that benefits the minor.
You may want to review trends in college costs, your financial situation and other factors before selecting the most appropriate college planning strategy. Whatever you decide, your family is likely to benefit from one of life’s greatest advantages — the gift of an education.
1If the account owner takes advantage of the five-year gift tax averaging rule and dies within five years of the funding date, the account owner’s estate will receive only part of the deduction. Please consult your tax advisor.
2Withdrawals used for expenses other than qualified education expenses may be subject to a 10% additional tax on earnings, as well as federal and state income taxes.
LPL Tracking # 1-655783