FINDING MONEY FOR COLLEGE
The cost of higher education is increasing relentlessly year by year with increases running well ahead of inflation. At some prestigious private colleges and universities, the cost of one year’s education alone, including room and board, has reached $40,000 to $45,000. Graduate school can run over $60,000.
That means the final cost of a Bachelor’s Degree can be $200,000 or more, and with many professions requiring graduate degrees and a medical education easily costing $400,000 or more, it quickly becomes apparent that few families can pay these bills out of current income. Even with only one child, costs can be prohibitive. For families with three or four children, college and graduate costs could reach or even exceed $1,000,000.
So how can a family build a fund for college? Experts have concluded that a family needs to look ahead and prepare for the financial burden. It is essential that they start putting money aside as early as possible. There are a number of ways to do this, and the method that is best will depend on the age of the child and the family’s resources and cash needs, as well as a number of other considerations.
There are a number of cash flow, academic, and tax strategies the can be utilized to save thousands of dollars on college expenses (use the BACK button on your browser to return to this website).
Taxes are another important concern. If money can be invested and earn interest, dividends or other income that is not taxed until needed for college expenses, the college fund will accumulate much faster than if taxes take a large bite out of it.
If a child is very young, perhaps even an infant, there are legal techniques for putting money and property into a child’s name. While some of the tax advantages were cut back by recent tax law changes, the technique is still worth considering. Since it is generally not advisable for minors to own property, or even bank accounts in their own names, gifts to minor children are usually made either to a custodian or trust.
The easiest way to make a gift to a child is to give the property to a custodian to hold for the child’s benefit. This simple procedure involves very little paperwork, hassle, legal or other fees. You do not need a legal document to make such a gift.
Years ago all states adopted the "Uniform Gifts to Minors Act" which authorized a custodial arrangement for cash, bank accounts, stocks, and bonds. More recently, half of the states replaced that law with a "Uniform Transfers to Minors Act" which allows the custodian to also hold real estate and other property, including limited partnership interests.
Who can be a custodian? It may be one of the parents, another relative or a family friend. But if a parent gives money or property to a child and makes himself or herself the custodian, those assets will be included in the parent’s taxable estate if he or she dies while holding the property as custodian.
All the money and property held in custody must be transferred to the child at age eighteen or twenty-one, depending upon state law. One must be aware, however, that at the age the child acquires complete access to the custodial funds, should he or she so choose, the funds can be used to buy a Porsche instead of paying for tuition.
Setting up a trust for a child is more cumbersome and expensive than the custodial arrangement, but is desirable in some situations. An important reason to transfer property to a trust for the benefit of a child is to diffuse the "Porsche Syndrome." Money in a trust, whether principal or income, will be used for the purpose which the creator of the trust intended - education.
The trust creator may wish to use the federal annual gift tax exclusion which allows an individual to give $10,000 each year to as many donees as desired, or $20,000 if a spouse joins in making the gift. This exclusion only works if the trust is structured so it creates a "present interest" in the child beneficiary. The present interest requirement may occur in a number of ways, some prescribed by the Internal Revenue Code and some by case law.
Discretionary trusts, in which the trustee is free to accumulate income, may be used to take advantage of the trust’s 15% bracket or to distribute it to a beneficiary in a bracket lower than that of the trust, assuming it has already retained at least $5,000 of income. Prior to making gifts or establishing trusts, each individual should evaluate how either of these methods will affect a long term financial plan and a college savings program.
You, a relative, or a close friend can serve as trustee. However, your attorney can explain the limitations on what a trustee can and cannot do. A well drafted instrument will have provisions for trust management in the event of incapacity of the original trustee.