Trust & Estates: College Savings Plans
There are number of ways to provide college savings for children, grandchildren, nieces, nephews and other relatives. Segregated savings plans, irrevocable trusts and gifts under the Uniform Transfers to Minors Act are all options having advantages and disadvantages.
A popular choice is the 529 Savings Plan, which gets its name from the section of the Internal Revenue Code that permits such plans to be established by states. Oklahoma has established such a plan and it is administered by the Oklahoma State Treasurer's Office. 529 Plans provide tax advantages and substantial control and flexibility. They are easy to establish and administer.
Your choice about which option(s) to use should be a part of your overall discussion with your estate planning attorney and your financial planner/advisor, so that it is well integrated with your Trust, Will and other estate planning documents.
You can establish a 529 Plan for any other individual, including a child, grandchild, niece or nephew.
Under most circumstances, the amount contributed to the Plan is exempt from estate and gift tax up to the $13,000 Annual Exclusion Limit per donor and beneficiary (or $26,000 for split gifts made by a husband and wife). A special provision in the Internal Revenue Code allows you to "front load" up to 5 years of contributions (i.e. $65,000) in the first year. This can be advantageous, but it also uses up your annual gift exclusion for the 5 years. You should consult with your tax advisor before using this option.
The earnings on the plan assets accrues free of income tax and when distributions are made for educational expenses such as tuition, books, mandatory fees, certain room and board and other authorized expenses, there is no income tax to the recipient.
You can remain as the account owner such that you can control the distributions. You may decide not to distribute the money to the initial intended beneficiary (e.g., he/she does not go to college), and direct the funds to another family member which can be the beneficiary's brother, sister, child, spouse, niece, nephew, first cousin or certain other persons related to the beneficiary. Basically you have broad authority to control the money and direct it to someone other than the initial beneficiary, if appropriate.
The Oklahoma 529 Savings Plan can be used at most accredited universities towards bachelor, associate and graduate degrees and certain vocational and technical schools. The student does NOT need to be attending an institution in Oklahoma.
Oklahoma residents are not limited to the Oklahoma 529 Savings Plan and may make contributions to other state plans, but there is at least one advantage to Oklahoma residents using the Oklahoma Plan.
Oklahoma residents using the Oklahoma 529 Savings Plan may deduct up to $10,000 ($20,000 on a joint return) per tax year for contributions to the Oklahoma 529 Plan on their Oklahoma income tax. At current tax rates, this can give you a tax savings of $550.00 per year ($1,100 on a joint return) per person contributing to the 529 Plan.
You may make investment decisions from a wide verity of mutual funds and other investment options. The Oklahoma 529 Savings Plan is managed by the TIAA-CREF Financial Services, as the plan manager. It is similar to a 401(k) in that regard.
529 Plans are popular because they are flexible (with regard to controlling who the ultimate recipient is) and have tax advantages. They are fairly easy to administer and there are several investment options that the owner can elect, depending upon the circumstances.
Once the contributions are made, they are exempt from the both the donor's and the beneficiary's creditors, so that if someone experiences financial difficulties, the money is safely segregated for the benefit of a student. Persons making contributions to a 529 Plan should be aware that they will not be able to retrieve the money for their own benefit. It is considered a completed gift.
More information is available at www.ok4saving.org for the Oklahoma 529 College Savings Plan. Your financial advisor may also be willing to assist you with this.
Harry V. Rouse