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| > Investing > College Savings Educator |
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| College Planning Q&A: 529s and Financial Aid |
| by
Susan T. Bart
| 08-22-08 |
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College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to advisorquest@morningstar.com.
Question: As parents, we have $28,000 in a 529 plan for a 16-year-old child and $28,000 in a 529 plan for a 12-year-old child. We also have a small LLC business. I understand that only about 5% of this money is considered in the financial aid calculation (Expected Family Contribution) on FAFSA because the account owner is the parent. Should I file the Account Owner change form with my state 529 plan to make the LLC the account owner of these accounts so none of it shows up on FAFSA, and if so, what are the tax consequences of the transfer? Any other tips or related ideas?
Susan: I advise clients to play it straight. As you noted, the result for financial aid purposes is favorable because the 529 savings accounts will be treated as assets of the parents and not as assets of the student. Further, changing the account owner to your LLC would increase the value of the LLC, possibly affecting the financial aid calculation. In addition, the financial aid officer would have discretion to disregard the change of account owner. And there might be other consequences, such as exposing the 529 assets to the creditors of your business. Be content with a good result, even if you could imagine a better one.
Question: A friend's brother recently passed away leaving a 9-year-old child and wife surviving. We are concerned that the mother will spend any remaining funds, leaving nothing for the child's education. We are considering having a fund-raiser to solicit contributions in order to create a 529 plan for the child and expect we could raise $40,000 - $50,000, but are looking for the most efficient way to accomplish this. Do you have any recommendations? We prefer not to use a trust.
Susan: The primary issue is whom do you trust to be the account owner, knowing that the account owner has no fiduciary duties to the designated beneficiary? Even if you trust your friend enough to serve in that role, do you trust whomever he may name as a successor account owner?
One possibility might be to establish the 529 savings account as a custodial account under the Uniform Transfers to Minors Act. The program should (but check the program description) prohibit the account owner of a custodial 529 account from distributing the funds to herself or from changing the beneficiary. Further, the program should require that the beneficiary become the account owner at age 21 (or the appropriate age under the Uniform Transfers to Minors Act), ensuring that the funds go to the beneficiary (but not necessarily ensuring that they are used for education).
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Susan T. Bart is a partner in the Private Clients, Trusts & Estates Group at Sidley Austin LLP in its Chicago office, where her practice includes estate planning, estate and trust administration, and fiduciary counsel. She has written two books, including Education Planning and Gifts to Minors published by Illinois Institute for Continuing Legal Education (iicle.com), which extensively discusses 529 plans.
She is the author of Education Planning and Gifts to Minors 2004 Edition. She is a frequent speaker on trust and estate topics in general and Section 529 college savings plans in particular.
The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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