Uniform Transfers to Minors Act _UTMA_

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Uniform Transfers to Minors Act _UTMA_ Powered By Docstoc
					Funding your child’s college education

             Vince Hilton
            Jared Peterson
              Brian King
Up Front Decisions
   How much are you going to pay for?
       All
       Some
       None
       Fixed Amount
       Percentage of the cost

    *Don’t let society influence your decision
Do Your Homework
   Try and guess where your child may choose
    to enroll
   Investigate a group of possible schools to
    find out the costs of attending there
       This will impact how you choose to save
   Take the time to get acquainted with different
    plans and what your state offers
Different Vehicles
   State College plans
   UTMA (Uniform Transfer to Minors Act)
   Coverdell Education Savings Accounts
    (Education IRA)
   Section 529
  State pre-paid Tuition
Advantages                    Disadvantages
 Effectively can lock-in a    Narrows School possibilities
  tuition rate                 If your child goes out of state
 After 2002 contributions      problems arise with
  tax deductible                contribution. (Check with state)
                               Reduces possibilities for
                                financial aid
                               Only covers tuition and fees in
                                many states
Some states allow out-of-state participation but may
not allow tax benefits (Check with state)
Varies greatly by state!!!
Uniform Transfers to Minors Act (UTMA)
  Uniform Gift to Minors Act (UGMA)

   Allow you to set aside money on behalf of a child
   Retaining control of the money, until the child reaches
    18 or 21 whichever is the age of majority in the state
   UGMAs will permit only transfers of:
        bank deposits
       Securities
       insurance policies
   UTMAs permit the transfer of
        any kind of property, such as real estate or artwork to the
UGMA & UGTA Pros/Cons
        Advantages                     Disadvantages
   You have control over         At age of maturity
    the account until the          money belongs to child –
    child's age of majority,       regardless of educational
    18 or 21, depending            aspirations
    on the state                  It may affect a child's
   You can choose what            ability to get financial aid
    type of investments to
Tax Consequences
   For children under 14
       the first $700 of income earned is tax-free.
       income from $701 through $1400 is taxed at the
        child's rate
       income over $1,400 is taxed at the custodian’s
   For children over 14
       all income is taxed at the child's rate
Similar Programs
   Donor-designated
       Money is designated for child’s education, but ownership
        is never transferred
       Greater chance for financial aid
       Taxed at adults rate
   Child’s Trust
       Allows various people to contribute to a single trust
       Does not affect Financial Aid opportunities
       Attorney’s fees to set up
       Gives the trustees power to deny funds if child doesn’t
        go to college
     Coverdell Education Savings Accounts
                Education IRA
   Starting 2002 up to $2,000 a year until child reaches
    age of 18
   Can be used to pay for public or private education at
    any levels
   Income level restrictions
   Grows-tax deferred
   Withdrawals for education are tax-free
   Money must be withdrawn before age 30
   At age 30 withdrawals must begin and 10% tax
    penalty and earnings are taxed as income
EIRA Continued
   Depending on the state and account the beneficiary
    can be renamed
   Anyone can contribute
   Contributor does not have to have any gross income
    for that year
   Not tax deductible
   Beneficiary can be changed to a relative only
   If withdrawals exceeds expenses for the year a 10%
    penalty and withdrawals are taxed
   Tax credit implications
Section 529 Plans
   The Small Business Job Protection Act of
    1996 included a provision for college savings
   This provision became known as the 529 plan
    (IRS code section 529), or Qualified Tuition
    Program (QTP)
   Two types: Prepaid Tuition and College
529 Prepaid Tuition Plans
   Prepaid Unit Plans:
       sell units that represent a fixed percentage of
       1 unit typically corresponds to 1% of a year's
   Contract Plans:
       parent agrees to purchase a specified number of
        years of tuition
529 Prepaid Tuition Plans
   Benefits:
       Parents lock in tuition prices at current rates
            tuition rates typically increase at about twice the inflation rate
       Good diversification strategy
            During recessions, state governments tend to reduce support for
             higher education, thus increasing public college tuition rates
            So when return on stock market investments decline, returns on
             prepaid tuition plans will tend to increase
       Guaranteed by state government (or private institution
        sponsoring the plan)
       Anyone can contribute
529 College Savings Plans
   Similar to a Roth IRA
       Funded with after-tax dollars
       Earnings grow tax deferred
   Differences:
       No income limits
       Contribution limits are much higher
529 College Savings Plans
   Benefits
       Earnings grow tax-deferred
       529 accounts are not subject to estate tax
       Up to 5 times the normal gift-tax exclusion (currently
        $11,000 annually) may be contributed tax-free to each
       Account owner (usually a parent) retains control over
        both the assets and the beneficiaries
       Beneficiaries may be changed at any time penalty-free
529 College Savings Plans
   Rules
       Principal may be withdrawn penalty-free at any
        time, for any reason
            Earnings can be withdrawn penalty-free for qualified
             educational expenses
            Earnings withdrawals for non-educational expenses
             subject to 10% penalty
       Withdrawals reduce beneficiary’s eligibility for
        federal financial aid