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Wednesday, June 11, 2014

Planning for College Tuition


In 1975 the annual tuition at USC was $2,700. My son Elliot has just completed his first semester at SC and I can tell you first-hand that the same tuition is…much more.

And so even though tuition levels have changed, one key piece of advice has remained the same 40 years later: start thinking about your child’s college education costs when your child hasn’t yet started preschool.

And for many of you the right “tool” to structure a college fund savings plan would be the “529” Education Plans. These plans are state-sponsored tax advantaged investment accounts established to pay for higher education expenses of another person. Tax advantaged in the sense that the fund’s principal grows tax-deferred and distributions for the beneficiaries, college costs are tax-exempt.

These plans are very flexible in that anyone can establish the fund (parent, grandparent, aunt or uncle or even an unrelated benefactor). In addition, the funds used for education are not just for traditional college and related tuition. They can be used for undergraduate, grad school or technical/trade schools. The funds can be utilized not only for tuition, but fees, books, supplies and reasonable cost of room and board as well.

At the onset, the adult establishing the account is the “owner” or “contributor” and the intended recipient is the “beneficiary.” The owner can change the beneficiary to another family member if circumstances change or if the funds are not depleted when the initial beneficiary completes their education.

From an estate planning perspective, generally, these funds are not part of the estate of the owner. However, it is important that the owner designate who is to receive the account upon the owner’s death. If not careful, as the new owner can change the beneficiary, your intended savings might pass to another relative, not the one to whom you intended to benefit from the accumulated savings.

The funding of the plan is considered a completed gift. A contributor may contribute up to $14,000 per year to a beneficiary’s account without exceeding the annual gifting exemption. If this is the only gift to the beneficiary during the year, there is no gift tax return filing requirement.

They may also front load five years of annual gift tax exemption, or $70,000. That is $140,000 for married parents or grandparents to start off the plan. A gift tax return is required, although not a taxable gift, when front loading the funding in excess of the annual exemption. Further, the plan can be funded with up to the maximum allowed by a particular states’ program. In California, the California Scholar Share College Savings Plan accepts contributions until all account balances in California’s §529 plans for the same beneficiary reach $371,000.

You are free to choose any state plan you want. On the website www.savingforcollege.com, there are options listed in a format where you can compare and contrast the various state plans. The investment structures and underlying fees in the funds are usually the distinguishing factors. The website highlights the financial investment options and is also full of valuable information about “529 Plans” in general.

Other than establishing the investment option within the state fund chosen, these accounts are not owner controlled. Although each state’s plan is different, generally, you are limited to the number of times you can change the investment strategy. For those of you who make your own investment decisions, this will not work for you. However, for those of you who can take their hands off the wheel, the reward is earnings and growth under these plans, when used for qualified education expenses, are not taxable upon distribution.

The President had recently issued a proposal to eliminate the tax-free status of these plans and then quickly rescinded that proposal amidst rapid responses from both sides of the aisle. Might it be a point of discussion in the future? In a far-reaching tax overhaul anything is likely but the rescission demonstrates there is a strong advocacy for the 529 plan to remain untouched.

As for me? I began planning for Elliot’s education early but the sale of my parent’s home, after they passed on, provided us with the means to fund Elliot’s education by laddering conservative investments in California municipal bonds that mature just prior to each of his years in college. I know my parents look down and approve of how these funds were used. And we look up and thank them—especially when USC the tuition invoices arrives.

With a plan in place, you and your college bound preschooler can have fun growing up together and know that if they work hard, perhaps they can come out of college entering a career of their choice without debt.

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