Saving For Your Child’s College Education

July 27th, 2020 by

It is customary, nowadays, that parents build a college fund for their minor child.  College funds are typically funded by the parents, and sometimes they are funded by grandparents.  These accounts, no matter what depository company is used, are in the name of one parent and the child, or both parents and the child.  Marital funds, by one or both spouse’s income during the marriage, are typically used to fund college accounts.  What happens if the child does not go to college, but instead joins the military and receives an education through the G.I. Bill, for example?  Any funds deposited into a college fund using marital funds will be returned to the marital estate.  These funds would then be distributed as a marital asset and divided between the parties.  Special provisions must be in place in any Judgment for Dissolution of Marriage outlining the distribution of funds deposited into a college fund that are not eligible to be used to fund a child’s college education.  Additionally, the funds that are remaining after the payment of a child’s college education, including tuition, books, dormitory fees (or apartment rental), lab fees, supplies, and the like should be returned to the marital estate and distributed equally, unless otherwise agreed by the spouses.

There are several ways to save for your child’s college education and it is important for you to understand the type of account that you are setting up for your child.  Two of the most commonly created accounts for children is a 529 account or a Uniform Gift to Minor Account (hereinafter UGMA). There are a few distinctions to consider when you are looking at setting either of the two aforementioned accounts for your child. It is important to know the type of account you are setting up for your child(ren) in order to understand taxability and control of the account.  

The gift to the child under UGMA is irrevocable and once the child turns 18 or 21, it becomes their sole account. For the 529 accounts, you are able to change beneficiaries to someone else and you can maintain control over the account.   The 529 account is a tax-free account and as stated above, it would be considered a marital asset and not an asset of the child.   However, a UGMA is taxed at the child’s tax rate.  This tax rate is lower than the parent’s tax rate and the UGMA is considered an asset of the child. 

 The UGMA can affect the Financial Aid of a student because it is considered as an asset of the child, whereas a 529 is not considered as an asset of the child.   Another distinction between a 529 account and a UGMA is that the 529 can only be used for qualifying expenses, while a UGMA has no restrictions for spending. The qualifying expenses for the 529 are the specific expenses related to education.  You can not purchase a car from the funds in a 529 account and avoid tax consequences.  

For most parents, the decision as to which type of account to create comes down to the ways in which the account will be used, who will have control of the account, and what are the tax ramifications for the account.  Consider these questions when you are making the decision as to which account to set up for the benefit of your child. 

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