College tuition costs are a substantial expense which continue to escalate. But estate planning can help address these expenses. There are options that can pay for higher education besides writing checks when tuition becomes due.
There are two options that help pay these costs. First, making a gift into a custody account or into a trust that meets the requirements of the Uniform Gift to Minor’s Act. Or you can fund a qualified tuition plan under section 529 of the Internal Revenue Code.
Prepaid plans and savings plans are the two types of 529 programs. These have advantages over a unified gift to minors act plans. Assets on earnings are not taxed until the funds are disbursed. Distributions are not taxed up to the amount of the student’s qualified educational expenses.
Some colleges allow purchase of tuition credits or certificates to lock in current tuition rates even though the child-beneficiary is not beginning college for some time. This is a savings if tuition rates rise.
Like an IRA or Roth IRA, tuition amounts in a savings plan depend on the investment performance of the money deposited in the plan. More costs are covered if performance grows but less costs are covered if it drops. Conservatism is beneficial if the need to distribute funds is approaching quickly.
Qualified higher education expenses
If a student is enrolled at least half-time, a qualified expense includes college tuition and $10,000 for public, private or religious school tuition. This expense also incudes fees, books, supplies, required equipment and reasonable room and board. Any college, university, vocational school, or other post-secondary school that can take part in a Department of Education student aid program are eligible.
A beneficiary is taxed for distributions that exceed qualified higher education expenses to the extent they are earnings on the account. A 10 percent penalty tax is also levied.
Beneficiaries are specified when funding begins. Beneficiaries can change, or funds may be rolled over to another plan for the same beneficiary or another beneficiary without tax consequences.
Contributions are treated as gifts to the student. These qualify for the annual gift tax exclusion, $15,000 in 2019, adjusted annually for inflation. Contributions that exceed this amount may be allocated over five years.
Attorneys can help achieve your estate goals. They can also prepare plans that meet your needs.