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Wealth Flash: Education Is The Gift That Keeps On Giving

| November 30, 2016
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2016

Education is the most powerful weapon which you can use to change the world.”                    -Nelson Mandela

Looking for a great gift this holiday season?

If you have family or friends with children, consider establishing or contributing to a 529 College Savings Plan. It's a great way to fund a future education and, let's face it, young children often enjoy the box and wrapping more than the gift.

At Clear Harbor, we are reminded that parents are grappling with the joy of raising children and concurrently contemplating efficient and effective college savings strategies.  There are many strategies that parents and grandparents (or any charitable family member or friend) ought to consider as they allocate college savings investments.  Understanding the complexities of the gifting process and incorporating these insights into education funding and overall estate planning can prove perplexing and time consuming.  

Any adult can open a 529 plan and fund it on behalf of a child. Once the account has been established, parents, grandparents, relatives, and friends can contribute.

For most Americans, college education is the second most significant cost following home ownership.  Tuition and fees have increased an average of 6-8% per year over the last several decades.  The average total cost of attendance for students living on campus is $22,750 at typical public 4-year university and $45,760 at an average private 4-year institution.  However, elite universities charge approximately $65,000 for both tuition and room & board.  The cost of funding a private four-year university education for a child born today is estimated at approximately $675,000. 

The good news is that there exist planning techniques that adults can embrace on behalf of their children and grandchildren which can minimize tax burden and amplify your worthy objective.

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An important consideration in this process is ensuring that parents or grandparents are compliant with gift tax laws.  Gifts of $14,000 (single filers), or $28,000 (married filing jointly) are allowed by the IRS tax code to occur on a tax-free basis.  Gifting can be allocated to a 529 education plan by an individual.  The benefit is that the 529 education plan provides tax-free growth and tax-free distributions contingent on the beneficiary of the plan utilizing the funds for higher education.  This is akin to the educational equivalent of a ROTH IRA.  Qualified expenses include tuition, fee, room & board and computer costs.  Adults who establish and allocate funds to a 529 education plan are also able to maintain control of the assets—a benefit over a direct gifting strategy.

The donor—let’s say a grandparent-- can elect to treat the gift as an annual gift or “front load” the 529 plan in the amount equivalent to five years of gifting ($70,000).  If the gift to the 529 plan is made jointly by let’s say both grandparents, the amount that can be invested can be up to $140,000.  

Another worthy consideration for families who are attempting to provide education solutions to their children, grandchildren, or other children is to pay the cost of education directly to the institution (note that room and board breaches the gifting rules and should be excluded.) This can be done without impact to the donor’s annual gifting exclusion. 

There are several other types of account structures and funding strategies that can be utilized to fund education that may be worth exploring as well.  For families that are not generating high levels of income yet and are seeking savings options not only for college but secondary private school, the Coverdell ESA plan may be worth exploring.

So, if you want to give a child something they'll always remember this holiday season, starting a college fund may fit the bill!

Members of the Clear Harbor team can work with each of you to select and open an appropriate education savings strategy that reflects your objectives.  

We welcome you to reach out to discuss some of these strategies further.

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