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Have you checked out the costs of tuition and room and board, at colleges and universities around the country
recently? Would you believe current private college expenses reach $35,000 for the year 2000-2001? It isn’t a
difficult extrapolation to conclude that these costs may exceed $50,000 per year in the very near future.
Clients with children or grandchildren who will face these costs, and who have liquid assets and potential
estate tax exposure should consider QUALIFIED STATE TUITION PROGRAMS (QSTPs), or Section 529 Plans.
Section 529 Plans are currently being offered by many investment firms in cooperation with various state
governments. The plans offered by different states, through particular investment firms, may vary as to the
type of investments permitted and/or offered. The popularity of these plans is spreading rapidly because of
their favorable tax consequences.
Gift Tax. The transfer of assets to a Section 529 Plan is considered a present interest gift, qualifying for the
annual exclusion. Thus, a married couple can contribute $20,000 per year for each individual beneficiary of a
plan.
If a contribution to a QSTP made in one year exceeds the annual exclusion, the taxpayer may elect to take the
aggregate contribution into account, for gift tax purposes, rateably over five years, beginning with the year of
contribution. (If a donor dies before the end of the carry forward period, the contributions allocable to periods
after death are includable in the donor’s estate).
Estate Tax. Other than the donor’s death during a period when the excess gift is being carried forward, a
QSTP will not be included in the donor’s estate. There is no limit on the number of QSTP accounts that an
individual may open and, therefore, a donor can, by opening multiple QSTP accounts, avoid substantial estate
tax.
Income Tax. These programs are exempt from income tax. The fund builds up tax-free, and the beneficiary
reports income when the educational benefits are received. Income is determined under §72 (relating to
annuity taxation). Donor contributions are recoverable tax-free, the appreciation being taxed to the beneficiary
(typically in a lower bracket) as received.
Room and board costs are now considered qualified higher education expenses eligible for funding by a
QSTP.
Other Educational Incentives. (1) Education IRAs and U.S. Savings Bonds programs are also tax favored
methods for higher education savings. However, Education IRAs are phased out for higher income taxpayers
and the amounts involved are minuscule compared to the benefits available through a QSTP; (2) Direct
Tuition Payments under Section 2503(e) are also tax favored transfers. There is no gift tax and the funds are
out of the donor’s taxable estate. In fact, the IRS recently ruled that a grandparent could prepay private school
tuition for multiple years and the payment would not be a taxable gift.
Conclusion. The potential transfer tax and income tax benefits from QSTPs are tremendous. Major investment
firms have formed alliances with various states to offer these plans. An investor/client does not have to be a
resident of the state in question in order to qualify. Investment professionals will have information on the
QSTP programs available through their particular firm. It might pay to shop around for the plan that best fits
the needs and objectives of your clients. The key to higher education funding is planning ahead. Don’t wait
until students are in high school
to think about college costs. A QSTP is a perfect vehicle from both a tax standpoint and an asset protection
standpoint to fund these costs, while retaining a significant amount of control in the hands of the donor-client.
A QSTP program fits into an overall estate plan and we will be happy to provide consultation to any of your
clients in devising and implementing a thoughtful, money saving estate plan.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| May 2000 TAX STRATEGIES FOR FUNDING HIGHER EDUCATION COSTS by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |