1. Education Funding Alternatives (including what to do with over-funded UGMAs/UTMAs) Carl Waldman, Esq. and Rich Linsday The Advisors Forum April 22, 2009 1

2. 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

3. QUALIFIED TUITION PROGRAMS (529 PLANS) 3

4. 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 4

5. 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 5

6. 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. – 2009-2010, also Includes purchase of computer technology or equipment 6

7. Other Considerations $1500 Reimbursement for student living at home Tax-free rollovers if within 60 days of distrib. (for PSAs) Costs – Issue where the state offers an identical plan with lower cost structure? 7

8. COVERDELL EDUCATION SAVINGS ACCOUNTS (ESAS) 8

9. Tax Considerations Funds to be used for qualified education expenses Contributions constitute a completed gift Funds are includible in the beneficiary’s estate 9

10. 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 10

11. 11 UTMA / UGMA ACCOUNTS

12. Tax Considerations Age of beneficiary Income used to support or maintain the minor Transfer to a minor under UGMA or UTMA Death of custodian 12

13. Other Considerations Gifts to UGMA or UTMA Beneficiary reaching age of majority Types of assets 13

14. 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? 14

15. 15 2503(C) MINOR’S TRUSTS

16. Tax Considerations Gift tax annual exclusion Contributions of up to $13,000 not subject to gift tax 16

17. 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

18. 18 DEMAND TRUSTS

19. Tax Considerations Immediately notify custodian of transfers to the trust $13,000 per year (in 2009) 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

20. Other Considerations Notices of gifts to trust Control over beneficiary’s use of property during lifetime and disposition upon death 20

21. 21 U.S. SAVINGS BONDS (SERIES EE)

22. 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 22

23. Other Considerations Bonds may be redeemed after 6 months Bonds are nontranferrable and payable only to owner 23

24. 24 LIFE INSURANCE

25. 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 25

26. Other Considerations Premature death of policy holder Universal life and variable universal life policies are best suited for cash value distributions 26

27. 27 DIRECT PAYMENTS TO AN EDUCATIONAL INSTITUTION

28. 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 28

29. 29 HEETS (Health & Education Exclusion Trusts)

30. 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 GSTT tax – ever 30

31. 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 31

32. 32 CREDITS AND DEDUCTIONS

33. Hope Scholarship/American Opportunity Credit Tax credit for up to four years of post- secondary education expenses Increase income level limits Hope Scholarship Credit back in 2011 33

34. 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

35. Tuition and Fees Deduction for $4,000 of the college tuition and related expenses Cannot be claimed if Hope or Lifetime Learning Credits are claimed in same tax year Expires at end of 2009 35

36. Deduction for Student Loan Interest Deduction for up to $2500 of student loan interest for college expenses 36

37. 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

38. Student Aid Free Application for Federal Student Aid (FAFSA) http://www.fafsa.ed.gov/http://www.fafsa.ed.gov/ College Parents of America (www.collegeparents.org) 38

39. 39 THANK YOU