Education Funding Alternatives (including what to do with over-funded UGMAs/UTMAs)

1. Education Funding Alternatives(including what to do with over-funded UGMAs/UTMAs) Carl Waldman, Esq. and Rich Linsday The Advisors Forum April 22, 2009

2. Increasing Demand • Rising college costs • Clients have need of advisors knowledgeable in educational savings techniques • Advisors have need of planning team members knowledgeable in these techniques

3. Qualified Tuition Programs (529 Plans)

4. Qualified Tuition Programs (529 Plans) • Prepaid Tuition Plans – state guarantees tuition rates frozen at current rate for investor • Savings Plans - essentially state-sponsored mutual funds

5. Tax Considerations • Income Tax • Distributions Before January 1, 2002 • Contributions were not deductible • Distributions After January 1, 2002 • Withdrawals from QTPs are tax-exempt if used for QHEEs • State Income Tax: Varies from state to state • Deduction for contributions • Taxation of distributions from out-of-state QTP • Gift, Estate and GST Tax

6. Other Considerations • Only cash (checks, money orders, credit cards, and similar methods) contributions are permitted to be made to and accepted by a QTP • Distributions tax-free only if for QHEEs • includes tuition, fees, books, supplies, equipment, and room and board while the student attends at least half of the prescribed course load. • 2009-2010, also Includes purchase of computer technology or equipment

7. Other Considerations • $1500 Reimbursement for student living at home • Tax-free rollovers if within 60 days of distrib. (for PSAs) • Costs • Issue where the state offers an identical plan with lower cost structure?

8. Coverdell Education Savings Accounts (ESAs)

9. Tax Considerations • Funds to be used for qualified education expenses • Contributions constitute a completed gift • Funds are includible in the beneficiary’s estate

10. Other Considerations • Cash-only contributions • Beneficiary’s parent or legal guardian controls the account until the beneficiary attains the age of majority • Change of beneficiary varies by plan

11. UTMA / UGMA Accounts

12. Tax Considerations • Age of beneficiary • Income used to support or maintain the minor • Transfer to a minor under UGMA or UTMA • Death of custodian

13. Other Considerations • Gifts to UGMA or UTMA • Beneficiary reaching age of majority • Types of assets

14. Over Funded UTMA/UGMA Accounts • Donor/Custodian wishes to retain custodianship as long as possible: Options? • Demand Right when the beneficiary reaches majority • Conversion to a 529 Plan or Other Assets • FLP or FLLC interest?

15. 2503(c) Minor’s Trusts

16. Tax Considerations • Gift tax annual exclusion • Contributions of up to $13,000 not subject to gift tax

17. Other Considerations • Continuing a minor’s trust after the beneficiary reaches majority • Beneficiary must have a reasonable period of time after attaining 21 to withdraw all of the trust principal and undistributed income • The trust should grant the minor a testamentary general power of appointment to avoid inclusion in parent trust maker’s estate, if beneficiary were to die

18. Demand Trusts

19. Tax Considerations • Immediately notify custodian of transfers to the trust • $13,000 per year (in 2009) allowed free of gift and GST tax • Assets removed from trust maker’s estate • Beneficiary of a demand right trust is the trust’s owner • For a grantor trust, the trust maker is the trust’s owner

20. Other Considerations • Notices of gifts to trust • Control over beneficiary’s use of property during lifetime and disposition upon death

21. U.S. Savings Bonds (Series EE)

22. Tax Considerations • Interest earnings exempt from state and local income taxes • Bonds issued in 1990 or later are exempt from federal income tax • Bonds held after the maturity date earn interest semiannually • Owner must report income at maturity

23. Other Considerations • Bonds may be redeemed after 6 months • Bonds are nontranferrable and payable only to owner

24. Life Insurance

25. Tax Considerations • Withdrawals from a cash value life insurance policy (other than a MEC) are not subject to income tax until the cumulative withdrawals exceed the cost basis • Policy loans from cash value life insurance policies may be used to avoid current income tax on cash distributions in excess of cost basis • If the policy continues until death, the income-tax-free death benefit will repay any policy loans

26. Other Considerations • Premature death of policy holder • Universal life and variable universal life policies are best suited for cash value distributions

27. Direct Payments to an Educational Institution

28. Considerations • Contribute directly to educational institution • Not subject to gift, estate, or GST tax • Donor should make contributions to the school while the child is presently enrolled • Make agreement with institution to pay future tuition increases • Should be non-refundable

29. HEETs (Health & Education Exclusion Trusts)

30. Tax Considerations • Relatively new concept • Trust designed to take advantage of gift and GSTT exclusions for direct payments to education institutions and medical providers • Properly drafted, trust will not be subject to GSTT tax – ever

31. Other Considerations • Should be established in a state that permits dynasty trusts • Requires a charitable beneficiary that has a significant interest that is not separate from the non-charitable beneficiaries’ interests • E.g., Give trustee discretionary distribution rights of principal and income to the charity • With a minimum “floor” distribution

32. Credits and Deductions

33. Hope Scholarship/American Opportunity Credit • Tax credit for up to four years of post-secondary education expenses • Increase income level limits • Hope Scholarship Credit back in 2011

34. Lifetime Learning Credit • Credit for 20% of up to $10,000 in combined tuition and mandatory fees • Cannot claim Hope Credit and Lifetime Learning Credit in same tax year

35. Tuition and Fees • Deduction for $4,000 of the college tuition and related expenses • Cannot be claimed if Hope or Lifetime Learning Credits are claimed in same tax year • Expires at end of 2009

36. Deduction for Student Loan Interest • Deduction for up to $2500 of student loan interest for college expenses

37. Tax-free Scholarships • Most scholarships and grants are tax-free if the recipient does not have to provide services in exchange for the award

38. Student Aid • Free Application for Federal Student Aid (FAFSA) http://www.fafsa.ed.gov/ • College Parents of America (www.collegeparents.org)

39. Thank you