Duke Schneider, Esquire

Part of the American dream is an accessible college education. For many of us, however, paying future college bills is a looming concern. Parents (or grandparents) of a child attending a four-year public university in 2017 could be looking at tuition, fees, and room and board running as much as $105,000. Send a child to a private school, and you could be looking at more than twice that amount, possibly averaging $225,000 for a four-year degree. And this doesn't take into account post-graduate tuition and expenses, such as medical, law, business or other Masters or Doctoral degrees. However, help for families is available via a 1996 change to the Internal Revenue Code.

The Section 529 College Savings Plan
To help families cope with the spiraling costs of college, Congress gave its blessing to state Section 529 Plans , named after that section in the Internal Revenue Code. This newer generation of savings plan offers a great alternative to previous, and less-appealing options. The Uniform Gift to Minors Account (UGMA) and Uniform Transfers to Minors Account (UTMA) both offered tax advantages, but also allowed the recipient unrestricted access to the funds once he or she reached 18 or 21. The education IRA had contribution limits. And, prepaid college tuition plans offered low rates of return and limited the choice of college. In contrast, 529 plans offer excellent tax advantages plus greater control and more flexibility in terms of contribution amounts and use of funds.

One of the most attractive features of the Section 529 plans for more affluent taxpayers is the tremendous estate planning opportunities they offer in addition to education planning. In fact, the Section 529 plan is monumental because, for the first time, contributions are treated as completed gifts even though the donor has the right to revoke the transfer and change beneficiaries. Typically, the IRS doesn't permit taxpayers to reduce their estate with revocable gifts because they are deemed incomplete.

Since the change went into effect in 1996, more than one million accounts have been opened in the states that have some variation of a Section 529 Plan.

How Section 529 Plans Work
Normally, annual gifts greater than $10,000 for one person or $20,000 per couple are applied against the estate tax exemption ($1 million per individual as of 2002.) In addition, if the gift is to a grandchild, the excess reduces the $1-million-per-grandparent lifetime exemption from the onerous generation-skipping tax.

With Section 529 plans, donors are permitted to bunch five years worth of annually excluded gifts - that's a total of $50,000, ($100,000 per couple) - and make one lump-sum payment for each child. Since the account is treated as a completed gift for estate-tax purposes, it transfers the money and the future appreciation out of the estate without counting against your estate and gift tax exemption. For example, grandparents may now give $400,000 from their estate to their four grandchildren - that's $100,000 per grandchild - without using a single dollar toward their unified estate and gift-tax credits.

And that's only the first benefit of this tax shelter; it gets even better. Once money is in a college savings account, it is placed in a mix of fund portfolios based on the age of your child. Typically, the allocation is most aggressive for newborns and becomes more conservative as college draws nearer. The money grows tax-deferred until it is withdrawn to pay for the costs of college. Tuition, fees, books, supplies and room and board are all valid expenses, and assets can generally be used for any accredited post-secondary school in the country, including public or private, community, graduate or vocational schools. Once withdrawn, the funds are taxed at the child's rate, usually 15 percent. In addition, some states exempt earnings from state taxation or allow a tax deduction on the money you invest if you do so in-state.

Greater Control, More Flexibility
Besides tax benefits, the great appeal of Section 529 plans is control. Even after you have contributed to an account, you retain control of the assets. Since there's no way of knowing whether your child, grandchild or other beneficiary will attend college or live up to family expectations, college savings plans allow a wide variety of options:

• If your beneficiary has not decided about college, you can leave the money in the account to grow tax-deferred. Generally there are no age restrictions for the beneficiary, and he or she could decide to enroll at a later date.
• You can change the beneficiary to another member of the same family. A wide range of people related to the beneficiary qualify, including siblings, spouses, parents, son or daughter, in-laws, aunts or uncles.
• You can get a refund from the account at any time and owe regular income taxes and a penalty on the earnings only (usually 10 percent). Penalty-free withdrawals are allowed if your beneficiary receives a scholarship, or in the event of death or disability.

This flexibility offers significant benefits over UGMA or UTMA custodial accounts since the contributions you make to custodial accounts are irrevocable and the child controls the assets at your states' age of majority (usually 18 or 21). Also, since the money in these plans is held in the names of the parents or grandparents, it does not have as large an impact on the financial aid formula under current interpretation of the laws. That's a big issue, since colleges assume students contribute 35 percent of their assets each year to education, but only 5.6 percent if the parents or guardians are paying the bill.

Getting Started
If higher education may be in the future for your children or loved ones, consider participating in a state-sponsored college savings plan today. You need to know that each state's plan is different, and some are rated higher than others. Be sure to compare investment returns, portfolio allocations, management fees, refund penalties, investment limits and contribution flexibility. Talk to your estate planning attorney or financial advisor. Excellent information is also available through the Internet. A good place to start is the College Savings Plan Network at www.collegesavings.org or The Sensible Investor at www.sensible-investor.com/529_plans. A web search for "college savings plan" or "529 plans" will bring up hundreds of other websites for you to review.

A college savings program that offers this level of tax relief, estate planning opportunities and investment flexibility is well worth considering as part of your personal estate plan.

MacElree Harvey
17 West Miner Street
Post Office Box 660
West Chester, PA 19381–0660
p | 610.436.0100
f | 610.430.7885
f | 610.429.4486
e | info@macelree.com