College Savings — How to Add to Savings?

College Savings: Where To Add to Savings?

Money Matters Radio – Estate Planning Checklist

By: Martin M. Shenkman, Esq.

Introduction/Overview: College savings have been hammered by the recession. Many parents and others are having to re-evaluate those savings and what they can afford to add to them. When you undertake this process use it as an opportunity to re-examine where those savings are – what format or structure have you used? How has economic turmoil and likely future changes affected the optimal choice for you?

Consider the following items?

√ Kiddie Tax Affects the Decision: Dividend and interest earnings of a child are not taxed at the child’s low tax rate if the so called “Kiddie Tax” applies. This law subjects a child’s income to tax at the parents high tax rate. This tough tax rule now applies up to a child up to age 18, it use to be only 14. Worse, even a child under age 23 who will be subject to this harsh rule if he or she is a full time student.

√ 529 Plans – The Positive: 529 plans rule! These are the choice pick for most Americans, and most folks are right to pick this approach, but not everyone.

• The Kiddie Tax, and the likelihood of increased income tax rates, all make 529 plans much more advantageous from an income tax perspective.


• Income earned inside the 529 plan is tax free and the use of 529 plan money for qualified tuition won’t trigger tax on distribution. That is quite a tax bennie! Hard to beat.


• Some states make this great benefit even better by giving you a state income tax benefit if you contribute to a 529 plan. That’s icing on the cake!


• There simple, you don’t need a lawyer and they cost nothing to set up.

√ 529 Plans – The Negative: 529 plans are not, in spite of the many benefits, the perfect answer. Consider the following:

• If you’re a shrewd investor in your own right (the recent recession has probably realigned those thoughts for many novices), or have great wealth managers, you might be able to do better than the available 529 plans have from a pure investment perspective.


• The plans are rigid. You have to give cash, you have to follow the rules.


• The estate tax looks like it is here to stay and probably will remain pretty tough. How does this impact 529 plans? If grandma has a taxable estate of which 45% of every extra dollar (or more!) is going to the tax coffers, it might be a better deal for her to pay for juniors college directly then for you to save for junior in a 529 plan.

√ Obama Tax Changes: Most pundits believe income tax rates will rise, certainly on the wealthiest tax payers. As deficits grow, the bar for “wealthy” may decline. If higher tax rates will nab your child via the Kiddie Tax, you need to give thought to the impact.

√ Custodial Accounts: A custodial account under the Uniform Gift or Transfers to Minors Act (UGMA or UTMA) under your state law had been the favorite choice for savings for many prior to 529 plans. These offer more flexibility, but the child gets the money at the age of majority. Junior might just like bright red sports cars more than college tuition! Finally, the nasty Kiddie tax makes custodial accounts really tax inefficient when compared to a 529.

√ Think Big Picture: You wanna do a job right you have to look at the big picture. The whole picture is what is really best for the entire family, not just for junior’s education costs. Therefore, consider your overall family planning. Example: Children’s trusts investing in FLP can enhance overall asset protection and estate tax minimization for the family. This might be better for the family as a whole.

√ Divorce:  Divorce affects every aspect of planning.

• If you have a custodial account who should be the custodian?


• If you are divorced or are in the process of divorcing have independent person named as the “Account Owner” on any 529 plan. The Account Owner can withdraw the 529 plan funds at anytime. You don’t want your ex running off with the kids college money and his/her new friend.


• Consider a trust. Name a bank or trust company to administer the funds. Even if it is a lousy tax result compared to a 529 plan it will assure that the kids college funds remain intact, are invested intelligently and that no one an fight over decisions.