A creative way for families to pay for their children’s college education involves transferring assets to them when they are minors.
(Now that's a good looking school.)
Most states allow transfers under one or both of two federal laws: The Uniform Gifts to Minors Act, (UGMA) and the Uniform Transfers to Minors Act, known as UTMA. Transfers to minors provide tax benefits to donors, but also are used to provide money for college.
Assets in UGMA and UTMA accounts become available to the minor when he or she reaches the “age of majority,” which differs from state to state. One key difference between the two types of accounts: Donors can contribute just about any kind of asset to UTMA accounts, including real estate. Donations to UGMA accounts, on the other hand, are limited to bank deposits, securities, and insurance policies. A word of caution: All assets transferred into UGMA and UTMA accounts are irrevocable; the child owns the assets whether he or she ends up going to college or not.
When you compare this strategy to 529 accounts, be conscious of the tax ramifications. UTMAs and UGMAs shift taxes from parent to child, whereas 529s eliminate them altogether, provided the money is used exclusively for education. If a child owns assets – and can reach them – the colleges will require these to be spent first on college costs before they will consider offering aid of any kind. Next, any asset owned by the parent is up for grabs, although not all of it. Nevertheless, a parent owning a 529 plan may not be taxed, but the assets will reduce the money that the college may offer in loans or grants. On the other hand, a 529 plan owned by a grandmother or an aunt would escape such scrutiny. This may matter. Of course, if the parents household income is high enough, none of this matters.
Suffice to say -- It's complicated.
At KeyAMS, we help you become the Master of your Financial Universe. How do we do that? By using a Strategic Wealth Planning Process that addresses your fears, your dreams, and your concerns to find out what matters most to you. We then connect money and time to your dreams to create goals. We run thousands of calculations to find the probability of you reaching these goals, and if the probability is none too great, we give you recommendations and strategies for improving your chance for success. College funding is just one of the many areas we delve into. To learn more, sign up for our newsletter on the link at the bottom of the home page.