College Planning 101
April 13, 2022
An Important “Early Decision” about College
If you’re the parent of a high school senior, or have ever been one, you know that ‘College Decision Day’ is fast approaching. It’s the date in early May when deposits are due, securing your loved one’s spot at what is hopefully the college of their dreams.
However, if your children, grandchildren, nieces, or nephews are not quite there yet, and you want to assist them with higher education expenses, there is a college decision you can make today: determining how to set aside the funds. Options include:
UGMA and UTMA Custodial Accounts: Uniform Gift to Minors Act accounts (UGMAs) or Uniform Transfers to Minors Act accounts (UTMAs) are custodial accounts owned by the child. Unlike 529 plans, there is no upper limit to contributions (but amounts above the federal gift limit are taxable gifts). And the funds do not have to be used to pay for college. So, if your loved one is awarded a merit scholarship, the money can be used for something else without penalty. However, the funds are not tax qualified, and since the funds are in the student’s name, they count as their assets, which could affect their ability to qualify for need-based student aid. And when the student reaches the age of majority, they gain control of the assets to use however they’d like.
529 Plans: To encourage families to save for college, states began introducing tax-advantaged 529 plans in the late 1980’s. You can front-load your contributions with up to five years of annual gift exclusions to get a jump-start on saving, but there are aggregate contribution limits set by the state. Rhode Island and Massachusetts have high limits, at $520,000 and $500,000, respectively, while Connecticut’s limit is amongst the lowest at $300,000* (You can select a plan outside of your state). The funds in a 529 plan must be used for education, and that includes elementary school, high school, and religious school. Depending on who owns the account, 529 plans are considered parental assets for financial aid purposes or the distributions are considered untaxed income to the student, but the impact on financial aid generally is smaller than UGMA or UTMA accounts. Along with other rules and restrictions, there is a 10% penalty for non-qualified withdrawals; however, you can change beneficiaries at any time, and any leftover funds can be transferred to a different beneficiary, including a sibling or cousin.
An Irrevocable Trust: For high net worth individuals, a trust may provide the most flexibility when it comes to saving for college. To begin with, unlike 529 plans, a trust can hold assets other than cash, such life insurance there are many options for investing the assets in the trust, and the funds are not limited to educational purposes. In addition, unlike UGMA and UTMA accounts, the funds are not limited to one beneficiary, and can remain in trust beyond the age of majority. Assets in the trust have higher levels of protection from creditors than the other options but are not tax advantaged (like 529 plans) and are a bit more complicated and costly to create and maintain than the other options. Please keep in mind a trust is a legal document that should be drafted by an experienced attorney.
In addition to these options, there are other ways to help a loved one save for college, including a Roth IRA, savings bonds, a gift of appreciated assets, or a combination of the options. When you’re ready to take College Planning 101 and start saving, please reach out to your Washington Trust Wealth Advisor for guidance.
Washington Trust Wealth Management helps clients create holistic wealth plans that include college savings, to help give their loved ones the best start in life. Follow us to learn more!
*”Maximum 529 Plan Contribution Limits by State,” Flynn, Kathryn, Saving for College, March 29, 2022.
What's the gift tax exclusion?
For 2022, the gift tax exclusion is $16,000 per individual/$32,000 for a married couple filing jointly. This is the amount you can give to a beneficiary for the year without filling out the gift tax return.
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