This post is the third in a series of posts highlighting college savings options. I’ve blogged recently about the Coverdell Education Savings Account and the 529 Plan. Today, I’d like to turn the spotlight on the custodial account.

A custodial account refers to an account under the Uniform Transfers to Minors Act and the Uniform Gifts to Minors Act. However, North Carolina’s Uniform Transfers to Minors Act (NCUTMA) superseded its Uniform Gifts to Minors Act in 1987. Essentially, NCUTMA is a more flexible statute and provides for a wider assortment of property that can be held for minors.

Perhaps the primary attraction of a custodial account is its simple set up and management. NCUTMA provides a list of property and the procedure for converting each property type into custodial property. Generally, a transfer of property to the person or institution who will serve as custodian of the property for a minor child accomplishes the desired conversion. NCUTMA also includes sample language that must be used as well as a sample form that may be required in certain circumstances to establish a custodial account. Afterward, the custodian can direct the investment of the custodial property and determine how the account is used to benefit the child.

Several possible disadvantages exist. First, custodial accounts are currently taxable. You do not get the tax-deferred growth as you do with a Coverdell ESA and a 529 Plan. Second, a custodial account is terminated and property is distributed to a beneficiary who has turned 21, or in some cases 18, which can be an unsettling thought for parents. Third, custodial property may impair the beneficiary’s financial aid eligibility since the custodial account is considered the child’s asset for financial aid purposes. Finally, if your goal is to remove property from your estate for estate planning purposes, then avoid funding a custodial account and serving as its custodian. Otherwise, the account will be counted in your estate if you die before the beneficiary turns 18 or 21 and the account is terminated and property is distributed.

A custodial account may be an easy way to set aside property for college savings. However, be sure to consider the potential disadvantages listed above as the amount of property increases beyond modest levels. For more information on custodial accounts and the NCUTMA, please contact our office today at (704) 887-4944 or info@starrettlawfirm.com to schedule a consultation.

Starrett Law Firm is a Charlotte estate planning, probate, and business law firm in Ballantyne that serves clients across the greater Charlotte area and North Carolina. We help clients understand complex legal principles and make sound decisions that protect them as well as their families or businesses. For more information about the firm, please visit our website at www.starrettlawfirm.com.

With tuition costs on the rise and college on the horizon for many parents, I thought you might find a series of posts highlighting several college savings options beneficial. My first post of the series featured the Coverdell Education Savings Account. This post covers the popular 529 plan.

The 529 plan is named after section 529 of the Internal Revenue Code which authorizes them. All states have some form of 529 plan, and many states allow non-residents to open a 529 plan. Be sure to research the specific details of any 529 plan that interests you.

North Carolina’s 529 plan is open to residents of any state, although only NC taxpayers are eligible for a state income tax deduction on contributions. Investments grow tax-free and account earnings escape federal and NC income taxes if withdrawals are used to pay for qualified higher education expenses such as tuition and room and board. Also, none of the assets will count against the beneficiary for financial aid purposes if the account owner is someone other than the beneficiary.

The generous contribution limits are, perhaps, the main attraction of 529 plans. Donors face no income-based contribution limits. Generally, individuals can contribute up to $13,000 annually ($26,000 for married couples) per beneficiary without incurring federal gift or generation-skipping transfer taxes. Under a special IRS rule for 529 plans, you can get a jump on tax-free growth and make five years’ worth of gifts in one year per beneficiary without incurring a gift tax as long as there are no further gifts to the beneficiary in the same five-year period. Under the NC 529 plan, a single beneficiary can receive contributions totaling approximately $380,000.

A potential disadvantage of 529 plans is the limited number of investment options provided under many 529 plans. Also, the IRS allows you to change your existing investment mix only once each calendar year or if your 529 plan beneficiary changes. A third consideration is the Pension Protection Act of 2006, which directed the US Treasury Department to issue regulations that guard against 529 plan abuse. Those regulations have yet to be released and may restrict some of the current flexibility of 529 plans.

Starrett Law Firm is a Charlotte estate planning, probate, and business law firm in Ballantyne that serves clients across the greater Charlotte area and North Carolina. We help clients understand complex legal principles and make sound decisions that protect them as well as their families or businesses. For more information about the firm, please visit our website at www.starrettlawfirm.com.

Our daughter turns 19 months old in a few days. Like many parents, we already worry about saving for college. Check out this nifty calculator, the “College Cost Projector,” to see an estimate of what college will cost by the time your son or daughter enrolls.

To help you begin building a college war chest, I have planned a series of posts to highlight several college savings options that you may wish to consider. One such option is the Coverdell Education Savings Account (ESA).

Named after the late U.S. Senator Paul Coverdell, ESAs were originally known as Education IRAs. An ESA allows for tax-free investment growth and withdrawals as long as the funds are used for the qualified elementary, secondary, or college expenses of a designated beneficiary.

In 2010, a donor may contribute up to $2,000 per child subject to limitations on the donor’s modified adjusted gross income. Just about any investment can be made inside of an ESA, and none of the assets will count against the beneficiary for financial aid purposes if the account owner is someone other than the beneficiary.

A perceived drawback of ESAs, besides the $2,000 annual contribution limit, is beneficiary-based age restrictions that affect contributions and distributions. Unless the beneficiary has special needs or an intra-family transfer is completed, contributions may not be made to an ESA after the beneficiary turns 18 and the ESA must be distributed before the beneficiary turns 30. Also, unless Congress acts before January 1, 2011, the annual contribution limit will decrease from $2,000 to $500 and only college expenses will be permitted.

Starrett Law Firm is a Charlotte estate planning, probate, and business law firm in Ballantyne that serves clients across the greater Charlotte area and North Carolina. We help clients understand complex legal principles and make sound decisions that protect them as well as their families or businesses. For more information about the firm, please visit our website at www.starrettlawfirm.com.