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M Beneficiary takes control of the account at age of majority. M Beneficiaries must be under age 18 when contributions are made. M Assets must be distributed by age 30 or earnings are taxed as ordinary income plus a 10% penalty. M Account owners can only invest cash, not appreciated securities. M Assets are child’s for financial aid purposes. M Income taxed at trust rates, which are often higher than individual rates. M Child gains control at age of 21 unless he or she gives up privilege. M May decrease chances of receiving financial aid. M Gifts to trust are irrevocable. M Only one individual can be the beneficiary (so there’s no ability to change beneficiary). calculations. N Unused funds can be used for retirement. N Account owners can take a loan from 401(k) plan and pay it back over time. M For traditional IRAs, ordinary income tax will be due on full distributions. M For Roth IRAs, ordinary income tax will be due on the earnings portion of the distribution if withdrawn before owner reaches 59 1/2. If owner has reached 59 1/2 and has held account for less than five years, full distribution is taxfree. M Withdrawals may be counted as income in financial-aid formulas. M Dollars used to pay back 401(k) loan are essentially double-taxed. M Account owners may hinder their retirement funding. UTMA/UGMA N Easy to open. N Less expensive than setting up a trust. N Can invest in wide variety of investment vehicles. N Donor can gift appreciated securities and cash. M Beneficiary takes control of money at statutory age (usually age 21 for gift accounts). M Accounts must be terminated once the child reaches statutory age. M Income subject to “kiddie tax.” Parent responsible for making sure tax return is filed on the child’s behalf. M If parent is donor and custodian of the account and dies, the UTMA/UGMA becomes part of parent’s taxable estate. M Because the child owns the account, up to 20% of this money will be counted toward the family contribution when determining financialaid eligibility. M Gifts made to UTMA/UGMA accounts are irrevocable. M No ability to change beneficiary. Crummey Trust N Can invest in wide variety of investment vehicles. N Child does not gain control at age of majority, although child has right to withdraw contributions when made. N Trust can have more than one beneficiary. N Gifts qualify for $12,000 gift-tax exclusion. M Can be expensive to set up. M Assets are child’s for financial-aid purposes. M Beneficiary could exercise his or her withdrawal right over contributions. M Only trusts for single beneficiary can qualify for GST exclusion for grandchildren. Savings Bonds Standard Brokerage Account in Parents’ Names 2503(c) Minor’s Trust N Maximum investment flexibility. N Investors avoid layer of fees charged by 529s and Coverdells. N Parents control assets. N Keeps assets out of child’s ownership for financial-aid purposes. N If child doesn’t go to college, funds can be used for any purpose. M Capital gains and income are taxed. M Does not remove assets from parents’ estate for estate and gift-tax purposes. N Safe. N Interest exempt from state and local taxes. N Series EE bonds purchased after 1989 and all Series I bonds allow tax-exempt distributions if used for qualified education expenses and if income limits are met. N Can buy $30,000 each of I-bonds and EEbonds a year. N No penalty if not used for college. N No account-maintenance fees. M Muted returns. M Income restrictions limit interest exclusion from taxes. M Only bondholder, his or her spouse, or a dependent is eligible for the interest exclusion. If grandparent holds the bond, he or she can’t claim any interest exclusion unless the grandchild is dependent. M Interest exclusion may be reduced by other education tax breaks (HOPE Scholarship, Lifetime Learning Credit, scholarships, Coverdell withdrawals, Section 529 plan withdrawals) when used in the same tax year. M Bondholder forfeits three months of interest if redeemed within five years. M Bond owner must be at least 24 years old. N Can invest in wide variety of investment vehicles. N Trustee can spend money on behalf of minor until he or she reaches age 21. N Can contribute an unlimited amount, but gifts in excess of $12,000 (most likely $13,000 for 2009) per year per beneficiary may be subject to gift tax. M Can be expensive to set up. Retirement Accounts N No 10% penalty on IRA withdrawals if used to pay qualified expenses. N IRA balances are not part of financial-aid MorningstarAdvisor.com 37

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Morningstar Advisor - Summer 2008

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