Education
Planning or College
Funding Planning
Education planning or college funding
planning refers to the following topics: 529 Plans, tax
credits for education expenses, investment planning for education
costs, and tax deductions or tax favorable treatment related to education expenses. To do education planning correctly requires a
good knowledge of income tax planning. To set up an asset allocation
for a 529 Plan requires special effort since changes inside the 529
account are allowed only once a year (except for during 2009 only).
Investment allocations need to be balanced between a need for the
higher returns from stocks on one hand contrasted on the other hand
with the fact that a tax-free vehicle is best used for bonds, so it may
be better to keep stocks out of a 529 Plan. Also the risk of a stock
market crash hurting your child's education budget are serious, so that
is another reason to consider bonds for the allocation. To have plenty
of time to recuperate from a stock market crash one should have a
minimum of ten years, preferably 17 years, and since many 529 Plan
participants will be spending the funds in a decade then there is
significant risk that stocks in a 529 Plan could result in a lower
return than bonds. Further
complicating the allocation decision is that many 529 Plans have
limited choices of expensive funds, so that implies it is best to use a
state plan that has a cheap bond index fund and use the 529 Plan as a
place to fulfill the "global" (big picture) bond allocation. This means
when funds are spent from the 529 Plan that the client would need to
re-allocate more of his other funds into bonds, assuming the goal was
to maintain the same proportion of bonds. 529 Plans require
documentation that college expenses are legitimate and busy, immature
students may not want to verify and document petty purchases, so it
maybe best to
limit 529 Plan spending to a few large, easily documented expenses.
College funding planning relates to integrated financial planning, the 529
Plan future contributions should be examined to see how it effects
estate planning. This is because contributions are subject to the
annual $13,000 tax-free gift limit and it may be best for high net
worth clients to refuse to give funds to a 529 Plan and instead give
each year $13,000 of FLP units or "Crummey ILIT Trusts" to their heirs.
Anyone can gift funds
for tuition without gift tax if they write the check payable directly
to the college, instead of to a 529 Plan.
For those who own small businesses and who can employ
their children in the business there are some tax advantaged ways to
pay for college using college funding planning. However, these must be offered to all
employees, so if
too many non-family employees want to go to college then it might be
unwise to offer this program.
Mayflower Capital
Donald
Martin, CFP®
1000 Fremont Ave.
Ste.
135
Los
Altos,
CA 94024
(650) 949-0775
Don@mayflowercapital.com
Donald
Martin is a Napfa
registered fee-only financial planner and investment advisor.
