COVID-19 has changed everything. Things we all took for granted, like school starting in the fall are now exceedingly uncertain. No one knows what the education landscape will be like in 2020-2021. Will classes continue to be online? Will colleges open and allow students on campus, or will they be bunking with mom and dad for the fall semester?
Despite all the uncertainty, one certainty remains: education is still going to be expensive. It is important for your planning to be as flexible as possible while still meeting your needs, particularly during these very uncertain times.
To make matters even more confusing, not all saving methods are created equal. Some education funding methods require that the funds be spent only on certain items to take full advantage of tax breaks and incentives. Other tools are less restrictive regarding how the money can be spent, allowing for more flexibility—which is important when you do not know how education will change in light of COVID-19.
Qualified Education Expenses Only
Coverdell education savings accounts. Money that is invested in a Coverdell education savings account can be used for must be used for college, as well as certain eligible high schools, middle schools, and elementary schools. But the fund can only be used for “qualified education expenses.”
If your child is enrolled in an eligible high school, middle school, or elementary school, qualified education expenses include tuition and fees, books, and supplies. Additionally, if the school requires or offers uniforms and transportation, these expenses may also be “qualified education expenses.” Room and board may be considered a qualified education expense if your child is enrolled at least half-time at the institution.
Moreover, expenses for computers and internet access are also allowed for students at all grade levels as long as they are primarily used by the student, or (for students in elementary, middle, or high schools) the student’s family. But, expenses for software that is not predominantly educational in nature, are not allowed. So tell your student that he or she needs to pay for the latest version of HALO his/herself.
529 plans. A 529 plan, also known as a qualified tuition program, requires that the funds be used for qualified education expenses to avoid paying income tax and a 10 percent penalty. You can also use a 529 plan to save for elementary, middle, and high school, but the funds can only be used to pay for up to $10,000 in tuition.
Just like a Coverdell education savings account, tuition and fees, books, supplies, and equipment are deemed education expenses for college education at an eligible institution. Additionally, room and board may be considered an education expense if the student is enrolled at least half-time.
Health and Education Exclusion Trust (HEET)
One interesting way to save for college is to set up a Health and Education Exclusion Trust (also known as a “HEET”). But be careful. If the trust does not pay the educational institution directly, the trust will be subject to gift and generation-skipping transfer taxes under Internal Revenue Code Sections 2503(e)(2)(A) and 2611(b)(1). Not surprisingly, the funds can only be used to pay tuition.
A HEET can be used for students at ANY grade level, from preschool through college. And it does not matter whether the student is full-time or part-time. But unlike 529 Plans and Coverdell plans, funds from a HEET can only be used for tuition and MUST be paid directly to the educational institution. This means that room and board, books, and other related expenses are not eligible education expenses for the tax exclusion.
Education Expenses Are Your Choice
Revocable education trusts and revocable living trusts. A revocable education trust or a provision in your existing revocable living trust can provide you with significant flexibility. As the person creating the trust, you can allocate the money and property to cover any expenses related to education. This includes not only tuition and institutional fees, but also room and board and other personal needs associated with attending school. An additional benefit of these planning tools is flexibility: if you need to change the amount of money you have given the trust, add or remove beneficiaries, or terminate the trust entirely, you have the ability to do so without any adverse tax consequences.
But, a significant downside of revocable trusts is that there are generally no income or gift tax benefits available for setting them up.
Irrevocable gifting trusts. Similarly, an irrevocable gifting trust allows you to define what expenses can be covered by the beneficiary’s share of the trust. The main difference is that by placing money and property into an irrevocable trust, you no longer have control over it. However, irrevocable gifting trusts can provide some tax advantages that revocable trusts cannot. The rules listed in the trust document will be used for the entirety of the trust’s existence, with some limited exceptions. Therefore, it is important to work with an experienced estate planning attorney to make sure that you plan for as many contingencies as possible.
Accounts with No Major Restrictions
Lastly, a Uniform Transfers to Minors Act or Uniform Gifts to Minors Act account does not impose any major restrictions on the use of the funds. When one of these accounts is created, the money or property is held by a custodian for the benefit of the minor. Because this property is technically owned by the minor, the custodian has the responsibility to manage, invest, and where appropriate, use the property for the benefit of the minor.
While there are no statutorily enumerated uses for the account, it is generally understood that these funds should not be used to pay for expenses that would normally be considered parental obligations, such as food, clothing, and shelter.
As soon as the beneficiary reaches the age of majority (eighteen or twenty-one depending on the state in which the student resides), the beneficiary is free to do whatever the beneficiary wishes with the money, with no restrictions.
Regnum Legacy Can Help
We are living in uncertain times, but we understand that providing for your family is always a priority. Having a plan in place designed for your family’s unique circumstances can provide substantial peace of mind. We are available, via telephone, video conference, or in person, to discuss the options available to you and your family as you navigate the current conditions and plan for your family’s education and financial future.
Having the right team in place is essential. For more help, here are some folks that I have personally used to help my own family, they may be able to provide you with more guidance and support.
Anthony Menichiello – Martin & Associates: Anthony is an enrolled agent with the IRS and has helped me and my family with our tax issues for several years. You can visit his website, here or give him a call: (714) 842-1234.
Marc Raymundo – Edward Jones: Marc is a great friend and has helped us set up our retirement plans as well as our traditional 529 plans for our children. He can definitely help you too! He is thoughtful, knowledgeable, and an awesome advisor to know. (951) 736-8500.
Warren Duthie – Duthie Financial Group: Warren is an innovator. He has help me and my family for several years with unorthodox methods for saving for college and retirement. (619) 541-5063.
Peter McGowan – Journey Financial Group: Peter helped broker all of our insurance needs. Had we not already had our financial house in order, he could have done that too! He is an amazing advisor and an even better person. (888) 560-4299.