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529 Plans Become an Attractive College Savings Vehicle October 9, 2007 By Scott Whittemore Are any of your clients planning to give gifts to someone to pay for college? Gifts can provide benefits beyond making the client feel good about making the gift. Gifting smart provides financial benefits as well. When assets are given to a friend or relative, those assets are removed from your estate, and transfer their future growth and income to that person as well. This strategy works best if the recipient is in a lower tax bracket. However, due to recent changes in the age limits of the “Kiddie Tax”, this strategy is becoming more difficult to implement. The Kiddie Tax makes a child’s unearned income (investment income) taxed at their parent’s higher tax rate. On May 25, President Bush signed the Small Business and Work Opportunity Tax Act of 2007 that, effective tax year 2008, expands Kiddie Tax rules to include unearned income received by a child: Who is under age 19 or under 24 and a full-time student; and Whose earned income is less than half of his or her support. This change is targeting full time students (college students) between 19 and 24. Up to tax year 2005, the age limit for the Kiddie Tax was 14. Now that the Kiddie Tax is expanded to college age kids, it is practically pointless to try to take advantage of your child’s or grandchild's tax bracket by transferring investment assets to them as long as they are attending school. Any child in college or graduate school will have their unearned income taxed at their parent's tax rate. These changes mean a Uniform Gifts to Minors Account (UGMA) or Uniform Transfers to Minors Account (UTMA) are far less attractive college savings options. Money in a UGMA or UTMA will likely be taxed at a parent’s rate. In comparison, all earnings in a 529 plan are tax deferred and withdrawals to pay education expenses are tax-free. In addition to the tax benefits, 529 plans provide much better control over how the money in the accounts are spent, more so than with UGMA or UTMA accounts. You will know the funds can only be spent on “qualified educational expenses”, not Corvettes or trips to Europe. The only real use for UGMA and UTMA accounts now is if the purpose of the account is not for college savings. They are not limited to education savings. They could use a (UGMA) or (UTMA), to start a business or pursue an alternative education path that cannot be funded from 529 Plans. This tax law change is a great reason to call your clients that have UGMA or UTMA accounts and let them know a 529 may be more attractive. For any of your financial planning needs, please contact Scott Whittemore at (415) 927-8430 or via email at swhittemore@quantumcap.com.

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