There are many incentives available for paying for higher education. I will attempt to list a few of the more popular ones, but in most areas, you can obtain all of the benefits by contacting a person who is dedicated solely to providing educational services. This individual usually charges a fee, but the fee is usually nominal compared to what the savings will be when you qualify for the benefits. You may also contact a local estate planning council to see if they have a member who provides these services, as opposed to merely selling products.
- 529 Savings Plan
With this plan you contribute money as a gift, (and the amount may be up to the annual exclusion for gift purposes - currently $14,000 per year in 2013) without having to file a gift tax return. The distribution is not taxed for federal income tax purposes so long as the funds are used solely for educational purposes, as defined. In addition, you may be able to transfer this account to other family members if the primary and intended initial beneficiary does not utilize the funds, for instance, if they do not attend school or they obtain a full scholarship. However, the assets in the fund may be assessed against you (the parent) for purposes of determining the formula for obtaining financial aid. This may be also be counted against you if a grandparent has contributed. It may also be assessed against your child, which is a different rate of assessment by the financial aid calculation.
- Educational Savings Bonds
These are bonds that are purchased from the U.S. Treasury, which must be owned by your (the donor’s) dependent. Again, these are not taxed if used for educational purposes, but if not, then the recipient of them will be taxed when they are cashed in. These also are limited, based on income, and they should be cashed in another year, rather than the year where the assessment is needed, as they are then counted towards the assessment for financial aid. Remember that although they are not going to be taxed if cashed in and used for education purposes, they are still utilized in the calculation for assessment for financial aid purposes.
- UGMA/UTMA –
These are Uniform Gifts to Minors Act / Uniform Transfers to Minors Act, which are assessed by the formula for financial aid. They could be converted to a 529 Plan if that would be beneficial for calculation of the assessment. However, when the beneficiary (child) comes of age, depending upon the state the plan is established under, then the beneficiary becomes the owner and can withdraw the funds at his or her discretion.
Hyman G. Darling, Esq.
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