Paying for College
(Including What to Do with OverFunded UGMAs/UTMAs)
Jonathan A. Mintz, J.D.
WealthCounsel & The Advisors Forum
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
Increasing Demand
• Rising college costs
• Clients have need of advisors knowledgeable
in educational savings techniques
• Advisors have need of planning team
members knowledgeable in these techniques
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A W E A L T H C O U N S EL C O M P A N Y
UTMA/UGMA ACCOUNTS
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A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
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Age of beneficiary
Income used to support or maintain the minor
Transfer to a minor under UGMA or UTMA
Death of custodian
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Gifts to UGMA or UTMA
• Beneficiary reaching age of majority
• Types of assets
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A W E A L T H C O U N S EL C O M P A N Y
Over Funded UTMA/UGMA
Accounts
• Donor/Custodian wishes to retain
custodianship as long as possible: Options?
• Demand Right when the beneficiary reaches
majority
• Conversion to a 529 Plan or Other Assets
– FLP or FLLC interest?
– Self-settled asset protection trust?
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A W E A L T H C O U N S EL C O M P A N Y
QUALIFIED TUITION PROGRAMS
(529 PLANS)
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A W E A L T H C O U N S EL C O M P A N Y
Qualified Tuition Programs
(529 Plans)
• Prepaid Tuition Plans – state guarantees
tuition rates frozen at current rate for
investor
• Savings Plans - essentially state-sponsored
mutual funds
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A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
• Income Tax
– Distributions Before January 1, 2002
• Contributions were not deductible
– Distributions After January 1, 2002
• Withdrawals from QTPs are tax-exempt if used for
QHEEs
– State Income Tax: Varies from state to state
• Deduction for contributions
• Taxation of distributions from out-of-state QTP
– Gift, Estate and GST Tax
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Only cash (checks, money orders, credit cards,
and similar methods) contributions are
permitted to be made to and accepted by a QTP
• Distributions tax-free only if for QHEEs
– Includes tuition, fees, books, supplies, equipment,
and room and board while the student attends at
least half of the prescribed course load.
– 2009-2010 only, also included purchase of computer
technology or equipment
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
– Who should you name as successor owner? From
SavingforCollege.com:
“If you do not like the idea of passing ownership along
to another individual, you may wish to consider
naming a trust as successor owner. You can control
the future actions of the trustee through the terms
of the trust, ensuring that the assets are used in the
intended manner.”
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A W E A L T H C O U N S EL C O M P A N Y
COVERDELL EDUCATION SAVINGS
ACCOUNTS (ESAs)
A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
• Funds to be used for qualified education
expenses
• Contributions constitute a completed gift
• Funds are includible in the beneficiary’s estate
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Cash-only contributions
• Beneficiary’s parent or legal guardian controls
the account until the beneficiary attains the
age of majority
• Change of beneficiary varies by plan
• Can be used for elementary and secondary
school expenses
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A W E A L T H C O U N S EL C O M P A N Y
2503(C) MINOR’S TRUSTS
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
• Gift tax annual exclusion
• Contributions of up to $13,000 not subject to
gift tax
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Continuing a minor’s trust after the
beneficiary reaches majority
• Beneficiary must have a reasonable period of
time after attaining 21 to withdraw all of the
trust principal and undistributed income
• The trust should grant the minor a
testamentary general power of appointment
to avoid inclusion in parent trust maker’s
estate, if beneficiary were to die
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A W E A L T H C O U N S EL C O M P A N Y
DEMAND TRUSTS
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
• Immediately notify custodian of transfers to the trust
• $13,000 per year (in 2012) allowed free of gift and
GST tax
• Assets removed from trust maker’s estate
• Beneficiary of a demand right trust is the trust’s
owner
• For a grantor trust, the trust maker is the trust’s
owner
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Notices of gifts to trust
• Control over beneficiary’s use of property
during lifetime and disposition upon death
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A W E A L T H C O U N S EL C O M P A N Y
LIFE INSURANCE
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
• Withdrawals from a cash value life insurance
policy (other than a MEC) are not subject to
income tax until the cumulative withdrawals
exceed the cost basis
• Policy loans from cash value life insurance
policies may be used to avoid current income tax
on cash distributions in excess of cost basis
• If the policy continues until death, the incometax-free death benefit will repay any policy loans
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Premature death of policy holder
• Universal life and variable universal life
policies are best suited for cash value
distributions
• Strongly consider ownership by an ILIT
– i.e., Demand Trust
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A W E A L T H C O U N S EL C O M P A N Y
DIRECT PAYMENTS TO AN
EDUCATIONAL INSTITUTION
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
Considerations
• Contribute directly to educational institution
• Not subject to gift, estate, or GST tax
• Donor should make contributions to the
school while the child is presently enrolled
• Make agreement with institution to pay future
tuition increases
• Should be non-refundable
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A W E A L T H C O U N S EL C O M P A N Y
HEETS
(Health & Education Exclusion Trusts)
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
• Relatively new concept
• Trust designed to take advantage of gift and
GSTT exclusions for direct payments to
education institutions and medical providers
• Properly drafted, trust will not be subject to
GST tax – ever
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Should be established in a state that permits
dynasty trusts
• Requires a charitable beneficiary that has a
significant interest that is not separate from
the non-charitable beneficiaries’ interests
– E.g., Give trustee discretionary distribution rights
of principal and income to the charity
– With a minimum “floor” distribution
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A W E A L T H C O U N S EL C O M P A N Y
U.S. SAVINGS BONDS (SERIES EE)
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
Tax Considerations
• Interest earnings exempt from state and local
income taxes
• Bonds issued in 1990 or later are exempt from
federal income tax
• Bonds held after the maturity date earn
interest semiannually
• Owner must report income at maturity
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A W E A L T H C O U N S EL C O M P A N Y
Other Considerations
• Bonds may be redeemed after 6 months
• Bonds are nontranferrable and payable only to
owner
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A W E A L T H C O U N S EL C O M P A N Y
CREDITS AND DEDUCTIONS
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y
American Opportunity Tax Credit
• Max. tax credit of $2500/yr. for up to four
years of post-secondary education expenses
• Increased income level limits over Hope Credit
– Available to those whose modified AGI is
$80,000 or less, or $160,000 or less for
married couples filing a jointly
– Phases out for higher income levels
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A W E A L T H C O U N S EL C O M P A N Y
Lifetime Learning Credit
• Credit for 20% of up to $10,000 in combined
tuition and mandatory fees
• Cannot claim Hope Credit and Lifetime
Learning Credit in same tax year
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A W E A L T H C O U N S EL C O M P A N Y
Tuition and Fees
• Deduction for up to $4,000 of college tuition
and related expenses
• Cannot be claimed if Hope or Lifetime
Learning Credits are claimed in same tax year
• (MAGI) must not be more than $80,000
($160,000 if filing a jointly).
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A W E A L T H C O U N S EL C O M P A N Y
Deduction for Student Loan
Interest
• Deduction for up to $2500 of student loan
interest for college expenses
• MAGI must be less than $75,000 ($150,000
if filing a jointly)
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A W E A L T H C O U N S EL C O M P A N Y
Tax-free Scholarships
• Most scholarships and grants are tax-free if
the recipient does not have to provide
services in exchange for the award
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A W E A L T H C O U N S EL C O M P A N Y
Student Aid
• Free Application for Federal Student Aid
(FAFSA) http://www.fafsa.ed.gov/
– 12% of the parent’s assets (special rules
determine this amount for financial aid purposes)
and 20% of the child’s assets are deemed available
for education
• College Parents of America
(www.collegeparents.org)
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A W E A L T H C O U N S EL C O M P A N Y
THANK YOU
A W E A L T H C O U N S EL C O M P A N Y
A W E A L T H C O U N S EL C O M P A N Y