Aimee O'Grady, Child Savings Specialist

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The Better Alternative to Coverdell ESA That You Didn’t Know Existed

Posted by Aimee O'Grady, Child Savings Specialist on Apr 27, 2016


Explaining the Coverdell ESA

Formerly referred to as the Education IRA, the name was changed to the Coverdell Education Savings Account in 2002. A Coverdell ESA permits custodians to save money for qualified education expenses for a named beneficiary who is under the age of 18 when the account is established. In addition, the savings can be used for both higher education and certain K-12 expenses. The Coverdell ESA is a tax-free investment option that offers tax-free withdrawals when the funds are used for qualified expenses. It’s attractive for families with fewer dollars to invest, who meet the eligibility requirements and aim to use the funds for both elementary and secondary as well as higher education expenses.  

Coverdell Advantages

1)     No Relationship Required. A Coverdell ESA does not require that there be a relationship between the custodian and the beneficiary. Friends, family and even companies or other entities may establish an account and make contributions.

2)     Child Contributor. For families who earn more than the maximum income permitted, the beneficiary may make contributions to the account themselves with money gifted to them if they earn less than the maximum income allowed.

3)     Qualified Expenses. With the option to use the funds for qualified elementary and secondary school expenses, the Coverdell ESA offers expanded savings options when compared to other plans.

Coverdell Disadvantages

1)     Low Maximum Limit. With a $2,000 maximum contribution limit, the Coverdell ESA has a much lower limit than other savings plans per child.

2)     Eligibility Requirements. Families must have a modified annual adjusted gross income of under $220,000 annually, or $110,000 for a single parent. Contributions made by individuals whose income exceeds this level will be subject to penalties.

3)     Withdrawal Age. Funds must be fully withdrawn by the time the custodian turns 30, unless the individual has special needs. Certain transfers to family members are permitted.

4)     Not tax-deductible. Finally, contributions to a Coverdell ESA are not tax-deductible.

The Better Alternative You Didn’t Know Existed

The Coverdell ESA has aspects that are appealing to parents, but it comes with its own set of limitations and drawbacks. The alternative to Coverdell ESA pertinent to college and education savings is a trust. Kiss Trust is the only provider of small trusts, family trusts and education savings trusts for parents saving for their child’s education and college expenses. With a trust, there are no annual contribution limits, and like Coverdell ESAs, anyone can contribute to it. With HESM provisions included, Kiss Trust lets parents create and fund trusts that can be used for education expenses. There is no limitation on annual salary either, so these trusts are available for anyone with a need to save and protect money for a child’s education. Unlike a Coverdell ESA, you can set distribution options to extend beyond the cutoff age of 30 years old, while preserving its principal. With one trust, family members can save for a child’s education, first home, retirement, and beyond with assurance that the funds will be used for the specified reasons.

Thus, a Coverdell ESA is an attractive savings plan for many families with the inclusion of qualified elementary and secondary education expenses, but it does come with its own set of limitations. When researching savings plans for college tuition, compare advantages and disadvantages with every plan before making a final decision that you may end up regretting.

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Tags: College Savings, Education Trust

What Happens To an UTMA Account When a Child Plans To Skip College

Posted by Aimee O'Grady, Child Savings Specialist on Mar 11, 2016


Not all beneficiaries will attend college, but they will still have access to the funds in their UGMA/UTMA account.   

Key Takeaways
  • Beneficiaries have unrestricted access to the funds in UGMA/UTMA Accounts.            
  • Custodians can withdraw funds if they are used to benefit the beneficiary, including converting into an irrevocable education trust for the sole use of the beneficiary.
  • Withdrawal of funds by the parent or custodian after the minor is of legal age is not allowed.

A Parent’s Worst Nightmare

An UGMA/UTMA account is an easy savings tool for parents to open for their children. The beneficiaries own the assets the moment the account is created and can access the money as soon as they are of legal age, often 18 or 21. Most UTMA and UGMAs, or custodial accounts, are opened as a way to save for higher education anticipating that the beneficiary will attend college. But what happens if they choose not to?


It's Their Assets… It's Their Choice

Simply put, the beneficiary of an UGMA and UTMA account can use the funds at their discretion, making them quite unpractical as a college-savings plan. These are custodial accounts for minors, which means the custodian manages the money until the minor attains the age of majority. Once they reach the age of majority, beneficiaries have unrestricted access to the assets in the accounts to do whatever they want. They can register for higher education courses, buy a car or go on vacation, since there are no restrictions on how the money can be used.

One of the benefits of these custodial accounts, however, is that they can be converted into irrevocable trusts. Prior to the age of 18, assets in UGMA/UTMA accounts may be withdrawn by the custodian and used for circumstances that benefit the beneficiary. Therefore, it is allowable for the funds to be converted into an irrevocable education savings trust.


UTMA Conversions Are Allowable, Easy, and Affordable

Prior to the UTMA or UGMA beneficiary reaching the age of majority, the custodian of the account (usually the parent or grandparent) has the ability to transfer the custodian account assets into an irrevocable savings trust for the sole use of the beneficiary.  This is often done by parents when they suspect assets put aside for education-related expenses could be frittered away by young beneficiaries who currently have no intention to currently attend school or have money management problems.

The advantage of converting UGMA and UTMA accounts into an education savings trust are:

  1. Defer access to assets until future date(s) or event(s) if beneficiary does not attend school
  2. Education Distributions can be made directly to the University
  3. GPA performance incentives are available
  4. Graduation incentives available
  5. Prevent use of funds for unrelated activities
  6. Preserve or maximize FAFSA considerations
  7. Ability to issue distributions as loans
  8. Minimum GPA requirement can be elected
Best of Intentions

Custodians be cautioned:  It is not allowable for custodians to withdraw assets from a UGMA/UTMA account for purposes other than those benefiting the beneficiary. Liability issues could result, regardless of how the custodian feels about the beneficiary’s decision to not attend college.

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Tags: College Savings, UTMA

How UTMA/UGMA Custodial Accounts Impact Student Financial Aid Eligibility

Posted by Aimee O'Grady, Child Savings Specialist on Feb 16, 2016


Parents should understand how UTMA and UGMA accounts could impact FAFSA eligibility for their children before they commit to a custodial account.

Key Takeaways

  • All assets belonging to a minor impact financial aid
  • Both minor and parental assets are recorded on the Free Application for Federal Student Aid
  • Assets belonging to a minor are weighed differently than assets belonging to parents

Convenience Can Cost You

UGMA and UTMA accounts are established by parents and guardians while their children are still young. These accounts are quick and easy to set up and serve as a depository for monetary gifts received over the minor’s lifetime.  They can also serve as college savings plans, since while students advance through school their savings accounts grow. During the child’s senior year of college, as students begin the financial aid process to help alleviate some of the financial burden of college tuition, they are surprised to see the role UGMA and UTMA accounts play and the impact that custodial accounts have on financial aid eligibility.

Impact on Financial Aid

FAFSA applications can be started on January of every year, where parents, college students, and students in their final year of high school can complete the Free Application for Federal Student Aid (FAFSA) until a specified date.  All assets, large and small, can potentially impact financial aid eligibility. Every asset belonging to the child (and the parents for that matter) diminishes the eligibility amount for grants and some scholarships.

Since assets in custodial accounts, such as UGMAs and UTMAs, belong to the minor, they are counted among the minor’s assets. The federal government treats assets belonging to a minor differently than those belonging to an adult. In 2016, the current financial aid formula requires that the minor contribute 20% of their assets to college costs annually prior to becoming eligible for financial aid; whereas parents must only contribute 5.6% of their assets. What this means is that UTMAs and UGMAs can hurt the minor's eligibility more than parent accounts.

Poor planning and the use of an inadequate savings account can cost thousands in lost grants, loans and other financial aid opportunities.  With the increased scrutiny financial aid officers employ since the federal takeover of the US student loan program, smart planning is imperative.  Luckily, other options such as specially formed irrevocable trusts help students and parents preserve positive treatment during the financial aid consideration process.

Learn more about navigating through the financial aid process and how we can help.

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Tags: Financial Aid, UGMA, UTMA

The Uniform Transfer to Minors Act (UTMA) Explained

Posted by Aimee O'Grady, Child Savings Specialist on Feb 12, 2016


The UTMA was created to help parents and guardians transfer property to minors, who are unable to invest in securities while underaged.

Key Takeaways

  • The UTMA was created to assist with property transfers to minors.    
  • The act permits custodians to use the funds to benefit the beneficiary.

History of the UTMA

While asset transfer to minors can be advantageous, especially with regards to estate planning, it is also rather risky. Most investors would prefer to not transfer valuable property to a minor for fear of mismanagement, or no management at all. In addition, third parties rarely deal with minors. To deal with this, in 1983, the United Law Commission announced the Uniform Transfers to Minors Act (UTMA). This was a modification to an earlier act referred to as the Uniform Gifts to Minors Act, which was formed in 1956. Today, every state and district has adopted some form of this act. 

What the Law Accomplished

During their 1983 meeting, the National Conference of Commissioners on Uniform State Laws revised and restated the Uniform Gifts to Minors Act (UGMA). The original 1966 Act was rearranged to include other forms of property and other forms of dispositions. The Act received a later revision in 1986.

The act permits a minor to receive gifts without the aid of a guardian or trustee. The investor acts as a custodian to manage the account, which protects the minor from tax consequences, up to a certain amount, until the minor reaches the age of maturity, generally age 18 or 21. Gifts under the UTMA can be money, real estate, inheritances or other property. Many investors elect to open UTMA accounts for their children because they can be opened quickly by filling out an application form and providing a social security number. The act even allows custodians to make payments on behalf of the beneficiary through the corpus of the gift.

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Tags: UTMA

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