We all know that the time to start saving for a child's college education is at birth. This way, the monthly hit to cash flow isn't as bad as it will be if you wait until Junior matures a bit before socking a few bucks away. But the reality is that life gets in the way, and this kind of savings plan doesn't work out too well for many Americans.

As financial planners, we frequently serve those with the means and desire to fund their children's college education, and these clients are hearing from every financial institution in America looking to help them do this. I believe that many CPAs are uniquely positioned to speak to their clients about the most effective way to save for their children's education, because issues of taxation and forecasts are frequently a part of the discussion.

Before you go right to the advice part of the education funding question with your clients, ask some open-ended questions about their desires and intentions with respect to college funding. You'll see that each client has their own idea of the best way to do this. Some will want to fully pay for anything and everything, including a mediocre to poor outcome as a student. Some will only fund the state university level of cost. And others will have strings attached to the college funding equation, such as matching funds from Junior for a part of the cost, or limits on the numbers of years or degrees they are willing to fund.

Once you get your client's desires on the table, the next step is to calculate how much they need to fund, in whatever increments your client feels are most achievable. Lump sums or monthly contributions are the most common methods. Clients whose compensation is bonus-driven may tie their contributions to their bonus schedule.



For clients who can make lump-sum contributions, the next issue is that of control and the actual structure of the account. How would your client like to control the funds? It is still common for clients to open UTMA or UGMA accounts in their children's names for college savings. This is my least favorite way to save for many reasons. First is the complete loss of control of the money when Junior turns 18 or 21. Junior will have the power at that age to withdraw any funds remaining for whatever they want - a sabbatical in Hawaii, a Harley, or season tickets to the Dodgers. The second part I do not like is that UTMA/UGMA accounts are fully taxable each year.

Most common are 529 plans, where the contributions are also made with after-tax dollars, but the earnings accrue without current or future taxation if the funds are used for college costs. Of course, you know that, as well as the benefits of any local or state tax deduction available in your state. The state tax reduction is frequently an enticer for clients, regardless of how small the actual benefit may be. For CPA financial planners with an asset management division or outsourced relationship, it is best to maximize the local or state deduction amount first, even if that plan may be unmanageable by you. Then you can fund the balance into whatever other 529 plan meets your clients' objectives that you can manage for them.

The 529 is controlled by the account owner, which can be the parent, the grandparent, or anyone whom the person writing the check designates as the owner of the account. This owner decides if they want to use the funds for college or not, with the child, who is the beneficiary of the account, having no control or access to the funds or the investment philosophy chosen. These plans are also somewhat portable, in that the owner can move around benefits to other siblings or grandchildren or the original beneficiary. A planning strategy for the future will be moving excess 529 plans from parents to new plans for their children. 529s are still pretty young, and there are not likely to be many 529 holders today who are also parents.

UTMA accounts can be rolled into a 529 plan and get the tax benefits of a 529. It will not, however, cede control away from the child when they reach the majority age of 18 or 21. As long as you have enough time remaining until college starts, this may be a beneficial move, regardless of the control issue, because of the tax benefits. There may be capital gains from the sale of holdings in the UTMA account, and that needs to be considered before moving a UTMA to a 529.

Another structural alternative would be a trust. While the trust would not have the tax advantages of a 529 plan, it may offer greater control. Some trusts are specifically established for college education, and others are by-products of other estate planning, where children were tertiary or lower beneficiaries of deceased parents and grandparents.

The controls that one can build into a trust that is specifically designed to fund college education can have any provisions or controls that are legal and that can be reasonably administered by a trustee. There are a few scenarios that I can think of where the trust route may make sense. One is when a grantor has reason to believe they will not survive the child's educational years, and they want to be assured that the funds are used for that purpose. It makes even more sense if there are no natural successors to the trustee role, and some sort of professional trustee is needed.

Another good reason for a trust is for the grantor who wants to endow a large family and perhaps future generations for educational purposes. In one case I saw the "rich" uncle, who wanted to exhaust his unified credit in the days of the $1 million credit, form an education trust for his nieces and nephews, and any successor generations to the extent that there were any funds remaining. Imagine how well this would work today in the days of the $5 million exemption.

Some of the strings or conditions that a grantor may include could range from complete discretion by the trustee through attainable standards for distributions. This may give the grantor an opportunity to foster whatever values they would like to see passed down the generations regarding education and their experience as young adults receiving higher education. Attainable or measurable standards can be achieving grades above a stated level, or volunteering at least a certain stated number of hours for some period of time to the grantor's favorite charity. In effect, any value or intention of the grantor can be worked into the language of the trust. Perhaps this educational legacy is just the incentive your wealthy clients need to take advantage of the $5 million unified credit, as it may be gone at the stroke of midnight on Dec. 31, 2012.



For those not looking to endow the generations, the next issue to tackle is that of how much to fund and how to invest the amounts. How much to fund is based on assumptions that may or not come true. When coming up with your assumptions for earnings on the funds, it is important to listen carefully to your client's understanding of risk and what level of volatility they are willing to accept.

The range of choices on how to invest college savings is limitless. Here the financial advisor's role is to help frame the assumptions based on the client's feelings about risk. If you have a risk-averse client, and that client is satisfied with a guaranteed 2 percent rate of return on a certificate of deposit, then you should forecast the amount they need to save based on that 2 percent level of earnings. Similarly, if your client tells you that they are an investment guru, and asks you to assume a 15 percent annual growth rate, you should probably explain to them why this may not be realistic or prudent.

In UTMA or 529 format, clients can use products offered by banks, fund companies, insurance companies, brokers or investment advisors. In these structures of ownership, you would be limited from owning any sort of business interest, real estate or other non-registered or non-banking product.

In the trust structure, the trustee can invest in anything that the trust permits and that is reasonable given the purpose of the trust. Wide discretion may be advisable if this is a very large trust. I suggest wide discretion because the investment world is changing, and the trends in what institutions and wealthy families own in their portfolios shift under different market conditions. For a trust designed to last a long time, these shifts can make the difference of a generation that may not receive benefits.

The hardest tolerance for risk to satisfy today is the very conservative college saver. That is because interest rates are so low that net real returns after inflation are likely to be negative in the short term. A solution offered by the life insurance community is to use whole life insurance as a college savings vehicle. To make a life insurance product an attractive savings vehicle, you must overfund the policy. Overfunding the policy to the maximum amount allowed under law will get your clients the highest rate of return on cash surrender value.

If you have an ultra-conservative client, consider getting an illustration using an insurance product. Make sure, however, that the assumptions used for earnings rate and mortality costs are what you ask for, and not what some overzealous general agent decides to use to make the policy look better than it is likely to perform.



A last thought on college funding is for your business-owner clients. Might their companies be able to hire their children for summer employment and part-time employment during school vacations? If yes, then paying them at the highest end of the reasonable compensation scale given their history and experience in your company could be tax-efficient. Perhaps your client can convince Junior to set up an automatic savings redirect from their paychecks for a percentage of their income and use those funds to pay for college.

The only thing guaranteed about a college education is that the cost is going to go up. Two other trends emerging due to the rising costs of higher education are the moves toward the state university system, and Junior having a little skin in the game in the form of loans. As a result, state schools are far more competitive than they've ever been, and simply getting admitted is a challenge for many. Make sure your clients understand that, and are prepared for the possibility a private school bump in cost, or Junior commuting to college to make it affordable. Another compounding factor forcing people to save on college costs is unemployment. Many kids finish college with debt and no prospects for professional-level salaries from employment.

And lastly, try to instill in your clients that your child's college education is not a bumper sticker contest for the rear of their SUV, and that there are legitimate low-cost options that can turn out great. One such option is to consider a community college for the first two years. If your child can thrive with excellent grades in that environment, getting into your state's best public university or even somewhere that would win you the bumper sticker contest is a distinct possibility.

John Napolitano, CFP, CPA/PFS, is chairman and CEO of U.S. Wealth Management, in Braintree, Mass.

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