College Planning

Graduation ceremonies abound this time of year.  It is a reminder that college expenses are just around the corner.

18 years ago, parents might have begun saving for their child’s college costs with a Uniform Gift to Minors Act (UGMA) or a Uniform Transfer to Minors Act (UTMA).  This is an account that is set up in the minor’s name.  A parent may be the custodian on the account.

These were popular because the earnings were taxed at the child’s tax rate.  Tax laws eventually changed and now the first $1,000 is tax exempt.  The amount between $1,000 and $2,000 is taxed at the child’s rate.  Amounts over $2,000 are taxed at the parent’s rate.

The amount you may accumulate in an UGMA is unlimited.  However, the annual gift tax amount does apply which is currently at $14,000.

There aren’t any restrictions on how the money may be used.  It can be used for travel costs to the college, off campus housing, clothing, medical insurance etc.  Monies can also be used on behalf of the child prior to college such as private schooling and summer camps.  However, basic needs of the child need to be paid by the parents or guardians.

Unlike some college savings programs, you can’t change the beneficiary on the account.  The child, for whom you set the account up, is the one who needs to use ALL the assets.  Ownership of the account is the student’s.

This has 2 drawbacks.  If you apply for financial aid, the monies are counted as the child’s and 30% of the assets will be included in the family contribution.  As the parent’s asset, only 10% of the assets is included.

The second drawback is the control of the assets transfers to the child at the age of majority, which may be 18 -21 depending on the state.  At 18 years of age, a car can be much more appealing than a college education.

Fortunately, Congress has established other tax favored means of saving for college expenses.
We will explore those options in the next few weeks.