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8. You help clients plan for their children’s (or grandchildren’s) college education.

Financial Planning > College Planning > Saving for College

3 Tax-Smart Strategies to Help Clients Plan for College

By Bryan Kirk

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What You Need to Know

  • A 529 plan account is a great option for clients looking to maximize their savings with the assurance that funds are dedicated to education.
  • UTMA accounts generally make sense for families looking to set aside funds with minimal hassle and maximum flexibility.
  • For families wanting flexibility but also protection on how assets are used, the answer is likely to be an irrevocable trust.

Graduation season often sparks conversations between financial advisors and their clients about saving for college.

Higher education is a significant investment for many families. Advisors can make this investment less daunting by helping clients create a tax-smart college savings plan.

There are several strategies to help clients support children, grandchildren or others pay for college. The key is aligning those strategies with the client’s goals and financial circumstances.

1. 529 College Savings Plan Accounts

One of the most common approaches to saving for college is opening a 529 college savings plan. A client can create an account for any individual — including children, grandchildren, nieces, nephews, friends, or even friends’ children or grandchildren.

Funds within a 529 plan are dedicated to “qualified higher education expenses.” This includes tuition, fees, books, supplies, equipment and room and board at eligible colleges and universities. Funds can also be applied to up to $10,000 a year of K-12 private or public school tuition, as well as up to $10,000 total per beneficiary for student loan payments.

Several tax benefits contribute to the popularity of 529 plans:

  • Accounts are not subject to income tax and can grow tax-free. Withdrawals for qualified education expenses are also tax-free. (Non-qualified distributions are subject to tax and a 10% penalty.)
  • In certain states, individuals can receive an income tax deduction for contributions to their state’s 529 plan.
  • Gifts to a plan account qualify for the annual gift tax exclusion, which allows individuals to give up to $17,000 in 2023 to any individual without any tax consequences. In addition, when giving to a 529 plan account, an individual can front-load up to 5 years of annual exclusion gifts. This allows individuals to make a larger gift all at once and have that amount grow tax-free for a longer time.
  • The owner of a plan account can control the investments and distributions of the account without having the account included in their estate for estate tax purposes. That is typically not true when a donor retains that type of control.

A 529 plan account is a great option for clients looking to maximize their savings with the assurance that funds are dedicated to education.

2. UTMA Accounts

Under the Uniform Transfers to Minors Act (UTMA), an individual can set aside funds in a custodial account for a minor child. The process can be as easy as opening as a traditional bank or investment account. In addition, there is no restriction on the type of assets that can be held by a UTMA custodian, which provides added flexibility.

The downside of a UTMA account is that once the child turns 18, or in some cases 21 years old, they can claim the assets and use the funds as they wish — education or otherwise. UTMA accounts also don’t provide tax benefits like a 529 plan account. A UTMA account is considered the child’s property and may be subject to the “kiddie tax.”

UTMA accounts generally make sense for families looking to set aside funds with minimal hassle and maximum flexibility on how funds are ultimately used — and who trust their children to make good decisions with the funds when they reach maturity.

3. Tailored Trusts and Direct Tuition Payments

For families wanting flexibility but also protection on how assets are used, the answer is likely to be an irrevocable trust. The main advantage of gifting assets in trust is the donor’s ability to dictate how assets are invested and distributed, which is done through the trust’s governing document. A trust can provide distribution options other than education. They also can be designed to last for multiple generations and hold any type or amount of property.

Families whose assets exceed the federal estate and gift tax exemption and generation-skipping transfer amount ($12,920,000 per individual in 2023) often combine irrevocable trusts with direct tuition payments to the college or university made by the parents and grandparents individually.

Direct tuition payments are not subject to gift tax and don’t count toward either the annual exclusion amount of $17,000 or the exemption amount of $12,920,000. As a result, families can maximize their tax-free wealth transfer by paying tuition bills as they arise.

Providing Personal, Goals-Based Advice

Advisors play a key role in providing guidance to individuals about their options for saving for college. By starting those conversations early, advisors enhance the options available to the client and maximize the potential value.

Bryan Kirk is the director of estate and financial planning and trust counsel at Fiduciary Trust International.

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