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COVERDELL ESA

Intro to ESAs
(Coverdell Education Savings Accounts)

Control of the ESA

I know that with a 529 plan I keep complete control of the account as the account owner and I can even ask that the account value be refunded to me. Does it work the same way with an ESA?

No, with an ESA the trustee or custodian must administer the account for the benefit of the child. Any withdrawals from the ESA must be for the benefit of the designated beneficiary and should not be refunded to the parent or other person who establishes the account. Because the beneficiary of the ESA is a minor at the time contributions are made, an adult is named as the "responsible individual" when the ESA is first established. The responsible individual is generally the parent or guardian of the beneficiary. The institution where you establish the ESA will have policies determining the decision-making authority for the account. As the responsible individual, you may be able to retain that authority for as long as the account is open (it must be distributed within 30 days after the beneficiary reaches age 30). Or you may be allowed to transfer that authority to the child once he or she reaches the age of majority.

But if I am the responsible individual, canít I prevent my child from using the funds for something other than college?

Yes, to a certain extent you have that capability, and so it does offer more control than a custodial account established under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) in that regard. But if the account is not completely withdrawn by the time the beneficiary turns age 30, the balance will be paid to the beneficiary within 30 days. And if the beneficiary dies, the account will be paid to the beneficiaryís estate unless his or her legal representative authorizes a change in the beneficiary to a surviving spouse or other family member under age 30.

Donít I have the option to change the beneficiary to another family member at any time?

Generally, you do, as long as you are the responsible individual and the agreement provides you with this right at the time you establish the account. You are permitted to change the beneficiary to another member of the family (as that term is defined under the law) without triggering income tax and penalty provided the new beneficiary is under the age of 30.

Letís say I wish to establish an ESA for my grandchild. Does all this mean that I am not able to change the beneficiary or ask for a refund of the account in the future?

That is correct. You can name either the parent or guardian of your grandchild as responsible individual, but you are probably not going to be able to name yourself. If you prefer that the parent/guardian not have the ability to change beneficiaries after you establish the account (you want the account to remain with your named beneficiary no matter what happens in the future) you should look to restrict the responsible individualís powers on the account agreement. In any event, you as grandparent (or uncle, aunt, neighbor, etc.) do not have the same ability to retain control that a 529 plan generally affords. This may play a part in your decision as to which vehicle to use.