Saving for College

Tax-Smart Strategies to Give the Gift of Education

01.09.2020 - Bryan Kirk

College is a significant investment—significant in terms of what it provides, and significant in terms of what it requires. This Insights details three college savings strategies to consider.

On the financial front, the good news is that there are several strategies to help you help your children, grandchildren and others pay for a college education. If used appropriately, these strategies can also produce valuable tax benefits.

529 Plans Are a Popular, Tax-Efficient Choice

When it comes to saving for college, 529 college savings plans are the first strategy that comes to mind for many.  Accounts under a 529 plan can be created for anyone—including children, grandchildren, nieces, nephews, friends or friends’ children and grandchildren. 529 plans are offered state-by-state, but you typically do not need to be a resident of a particular state to participate in one of its plans. 

Funds transferred to a 529 plan account are dedicated to “qualified education expenses” of the account beneficiary, which include tuition and other expenses of college, university or post-secondary vocational school, as well as up to $10,000 a year of K-12 private or public school tuition and a lifetime limit of $10,000 for payment of student loan obligations. 

Other key benefits and considerations include:

  • Income Tax Savings. A main benefit of setting up a 529 plan account is the ability to grow the assets tax-free. Assets in a 529 plan account are not subject to income tax, and withdrawals for qualified education expenses also are tax-free. In addition, if you participate in your home state’s 529 plan, contributions you make may be deductible for your state income taxes.
  • Accelerated Gifting. Generally, an individual can give up to $15,000 a year to anyone else without being subject to federal gift, estate or generation-skipping transfer tax. With contributions to a 529 plan account, you can accelerate up to five years of these “annual exclusion” gifts into the current year and make a larger gift all at once rather than stretch your gifts over a period of years. For example, a couple could set up 529 plan accounts for each of their 3 grandchildren, each with an initial contribution of $150,000. In addition to providing a solid nest egg to cover each grandchild’s education costs that can grow tax-free they also would remove a total of $450,000 from their taxable estate.
  • Account Owner Controls the Assets (with an Investment Caveat). The owner of a 529 plan account controls how funds are invested and when withdrawals are made. You may be the owner of an account you create. Alternatively, you can name a parent or other person close to the beneficiary. In designating an account owner, it should be noted that earnings withdrawn for non-qualified expenses are subject to income tax and a 10% penalty. In addition, while there are a variety of 529 plans to choose from, a main downside of 529 plans is that investment options are determined by the financial services company partnering with a state to offer a particular plan.
UTMAs Offer Simplicity

A simple way to set aside funds for a child to pay for college is to fund a custodial account for the child under a Uniform Transfers to Minors Act (UTMA). While they are not designed specifically for college savings, anyone can establish an UTMA account and the process can be as quick, easy and inexpensive as setting up a new bank or investment account. 

In effect, the custodian holds the funds in an UTMA account in trust for the child, but without the legal complications and cost (as well as the tailored protections) of establishing a formal trust. 

Key considerations include:   

  • Investment Flexibility. There is no restriction on the assets that can be held by an UTMA custodian. An UTMA custodian is free to invest across the full range of possibilities, including interests in real property or privately-held companies.
  • Potential Income Tax Savings. Assets held in an UTMA account are considered the property of the child. As a result, income on the account assets may be taxed at more favorable rates. But close analysis is needed. While a child generally will be in a lower tax bracket unearned income of a child over $2,200 is taxed at the generally higher rates for their parents under the so-called “kiddie tax.”  
  • Child in Control Upon Maturity. The main downside of an UTMA account is the limited control you have over the assets. First, if you are custodian of assets you gift to an UTMA account, the assets will remain part of your estate for estate tax purposes. Second, UTMA accounts are generally required to terminate when the child attains either age 18 or 21.  At that point, the child can claim the assets and is free to do whatever they like. In this regard, it will in many cases be up to the child to decide whether they actually use the funds to pay for college.
Trusts: The Tailored Option

For many families, the limitations of 529 plans and lack of restrictions with UTMA accounts leave them in need of a more tailored option. In this context, an irrevocable trust is the answer. An irrevocable trust offers flexibility around investments and distribution standards, as well as the ability to include safeguards to ensure funds are used by the beneficiary in line with your wishes.  

Key benefits and considerations include:

  • Potential Income Tax Savings. An irrevocable trust doesn’t offer the tax-free growth of a 529 plan, but it is possible for you to remain responsible for paying the income taxes on assets gifted to a trust, and in effect, compound your gift by allowing it to grow tax-free to the beneficiaries. In addition, it may be possible to avoid state income taxes by locating a trust in a jurisdiction such as Delaware.
  • Gift and Estate Tax Planning. To qualify gifts to an irrevocable trust for the gift tax “annual exclusion,” the beneficiary must be given the right to withdraw assets from the trust for a period of time after the gift is made to the trust. Alternatively, a trust for a minor can be created where the withdrawal power only applies when the beneficiary attains age 21, provided other requirements are met. In either scenario, attention must be paid both to the drafting and administration of a trust. In addition, you generally should not act as trustee of irrevocable trust you create for estate and gift tax purposes.
  • Donor Control. The main advantage of gifting assets in trust is your ability to dictate how the assets are invested and distributed by expressing your wishes in the trust’s governing document. You control the timing of distributions. You also control the standards or conditions for when distributions are made. Unlike a 529 plan, you can provide for options other than education for distributions. For example, if a grandchild decides not to pursue a college education, you could provide for distributions for support or investment in a business, or expand the class of beneficiaries eligible to receive education-related distributions.
Professional Guidance Can Help

There are other considerations involved in choosing the best vehicle for you.  The effectiveness of each strategy depends on a wide variety of individual factors personal to you and your beneficiaries.  From the scope and nature of your personal assets to a student’s potential eligibility for financial aid, we can help guide you through these and other options. 


This communication is intended solely to provide general information. The information and opinions may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.



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