A W E A L T H C O U N S E L C O M P A N Y Paying for College (Including What to Do with Over- Funded UGMAs/UTMAs) Jonathan A. Mintz, J.D. WealthCounsel & The Advisors Forum

A W E A L T H C O U N S E L C O M P A N Y Increasing Demand Rising college costs Clients have need of advisors knowledgeable in educational savings techniques Advisors have need of planning team members knowledgeable in these techniques 2

A W E A L T H C O U N S E L C O M P A N Y UTMA/UGMA ACCOUNTS 3

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Age of beneficiary Income used to support or maintain the minor Transfer to a minor under UGMA or UTMA Death of custodian 4

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Gifts to UGMA or UTMA Beneficiary reaching age of majority Types of assets 5

A W E A L T H C O U N S E L C O M P A N Y Over Funded UTMA/UGMA Accounts Donor/Custodian wishes to retain custodianship as long as possible: Options? Demand Right when the beneficiary reaches majority Conversion to a 529 Plan or Other Assets – FLP or FLLC interest? – Self-settled asset protection trust? 6

A W E A L T H C O U N S E L C O M P A N Y QUALIFIED TUITION PROGRAMS (529 PLANS) 7

A W E A L T H C O U N S E L C O M P A N Y Qualified Tuition Programs (529 Plans) Prepaid Tuition Plans – state guarantees tuition rates frozen at current rate for investor Savings Plans - essentially state-sponsored mutual funds 8

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Income Tax – Distributions Before January 1, 2002 Contributions were not deductible – Distributions After January 1, 2002 Withdrawals from QTPs are tax-exempt if used for QHEEs – State Income Tax: Varies from state to state Deduction for contributions Taxation of distributions from out-of-state QTP – Gift, Estate and GST Tax 9

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Only cash (checks, money orders, credit cards, and similar methods) contributions are permitted to be made to and accepted by a QTP Distributions tax-free only if for QHEEs – Includes tuition, fees, books, supplies, equipment, and room and board while the student attends at least half of the prescribed course load. – only, also included purchase of computer technology or equipment 10

A W E A L T H C O U N S E L C O M P A N Y Other Considerations – Who should you name as successor owner? From SavingforCollege.com: “If you do not like the idea of passing ownership along to another individual, you may wish to consider naming a trust as successor owner. You can control the future actions of the trustee through the terms of the trust, ensuring that the assets are used in the intended manner.” 11

A W E A L T H C O U N S E L C O M P A N Y COVERDELL EDUCATION SAVINGS ACCOUNTS (ESAs)

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Funds to be used for qualified education expenses Contributions constitute a completed gift Funds are includible in the beneficiary’s estate 13

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Cash-only contributions Beneficiary’s parent or legal guardian controls the account until the beneficiary attains the age of majority Change of beneficiary varies by plan Can be used for elementary and secondary school expenses 14

A W E A L T H C O U N S E L C O M P A N Y 2503(C) MINOR’S TRUSTS

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Gift tax annual exclusion Contributions of up to $13,000 not subject to gift tax 16

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Continuing a minor’s trust after the beneficiary reaches majority Beneficiary must have a reasonable period of time after attaining 21 to withdraw all of the trust principal and undistributed income The trust should grant the minor a testamentary general power of appointment to avoid inclusion in parent trust maker’s estate, if beneficiary were to die 17

A W E A L T H C O U N S E L C O M P A N Y DEMAND TRUSTS

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Immediately notify custodian of transfers to the trust $13,000 per year (in 2012) allowed free of gift and GST tax Assets removed from trust maker’s estate Beneficiary of a demand right trust is the trust’s owner For a grantor trust, the trust maker is the trust’s owner 19

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Notices of gifts to trust Control over beneficiary’s use of property during lifetime and disposition upon death 20

A W E A L T H C O U N S E L C O M P A N Y LIFE INSURANCE

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Withdrawals from a cash value life insurance policy (other than a MEC) are not subject to income tax until the cumulative withdrawals exceed the cost basis Policy loans from cash value life insurance policies may be used to avoid current income tax on cash distributions in excess of cost basis If the policy continues until death, the income- tax-free death benefit will repay any policy loans 22

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Premature death of policy holder Universal life and variable universal life policies are best suited for cash value distributions Strongly consider ownership by an ILIT – i.e., Demand Trust 23

A W E A L T H C O U N S E L C O M P A N Y DIRECT PAYMENTS TO AN EDUCATIONAL INSTITUTION

A W E A L T H C O U N S E L C O M P A N Y Considerations Contribute directly to educational institution Not subject to gift, estate, or GST tax Donor should make contributions to the school while the child is presently enrolled Make agreement with institution to pay future tuition increases Should be non-refundable 25

A W E A L T H C O U N S E L C O M P A N Y HEETS (Health & Education Exclusion Trusts)

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Relatively new concept Trust designed to take advantage of gift and GSTT exclusions for direct payments to education institutions and medical providers Properly drafted, trust will not be subject to GST tax – ever 27

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Should be established in a state that permits dynasty trusts Requires a charitable beneficiary that has a significant interest that is not separate from the non-charitable beneficiaries’ interests – E.g., Give trustee discretionary distribution rights of principal and income to the charity – With a minimum “floor” distribution 28

A W E A L T H C O U N S E L C O M P A N Y U.S. SAVINGS BONDS (SERIES EE)

A W E A L T H C O U N S E L C O M P A N Y Tax Considerations Interest earnings exempt from state and local income taxes Bonds issued in 1990 or later are exempt from federal income tax Bonds held after the maturity date earn interest semiannually Owner must report income at maturity 30

A W E A L T H C O U N S E L C O M P A N Y Other Considerations Bonds may be redeemed after 6 months Bonds are nontranferrable and payable only to owner 31

A W E A L T H C O U N S E L C O M P A N Y CREDITS AND DEDUCTIONS

A W E A L T H C O U N S E L C O M P A N Y American Opportunity Tax Credit Max. tax credit of $2500/yr. for up to four years of post-secondary education expenses Increased income level limits over Hope Credit – Available to those whose modified AGI is $80,000 or less, or $160,000 or less for married couples filing a jointly – Phases out for higher income levels 33

A W E A L T H C O U N S E L C O M P A N Y Lifetime Learning Credit Credit for 20% of up to $10,000 in combined tuition and mandatory fees Cannot claim Hope Credit and Lifetime Learning Credit in same tax year 34

A W E A L T H C O U N S E L C O M P A N Y Tuition and Fees Deduction for up to $4,000 of college tuition and related expenses Cannot be claimed if Hope or Lifetime Learning Credits are claimed in same tax year (MAGI) must not be more than $80,000 ($160,000 if filing a jointly). 35

A W E A L T H C O U N S E L C O M P A N Y Deduction for Student Loan Interest Deduction for up to $2500 of student loan interest for college expenses MAGI must be less than $75,000 ($150,000 if filing a jointly) 36

A W E A L T H C O U N S E L C O M P A N Y Tax-free Scholarships Most scholarships and grants are tax-free if the recipient does not have to provide services in exchange for the award 37

A W E A L T H C O U N S E L C O M P A N Y Student Aid Free Application for Federal Student Aid (FAFSA) – 12% of the parent’s assets (special rules determine this amount for financial aid purposes) and 20% of the child’s assets are deemed available for education College Parents of America ( 38

A W E A L T H C O U N S E L C O M P A N Y THANK YOU