Dear Joe, A good friend of mine recently passed away, leaving behind a 3-year-old son. We would like to set up some sort of college savings fund in order to offset the cost of his university education, but we're uncertain about how to proceed. What would you suggest? -- Emory
One approach would be to hire an attorney to help you in establishing a trust that names the child as beneficiary. The terms of the trust would control the use of funds -- in this case to pay for the beneficiary's college expenses. You could name yourself as trustee, or look to a bank, trust company or other professional fiduciary to fill that role. The trustee would be responsible for investing the trust's assets, filing the trust's tax returns and making the appropriate distributions.
The effort and expense of establishing and maintaining the trust can be substantial, and I'm guessing the amount you are contemplating is not enough to justify that expense. A 529 plan may be a better alternative. With a 529 plan, an account could be set up for your friend's child, and contributions to the account could be made by you and others who wish to help fund it. The 529 account would grow tax-deferred and be distributed tax-free for the beneficiary's qualified college costs, thereby avoiding income taxes.
An important consideration, should you decide to use a 529 plan, is naming someone as "account owner." The account owner in a 529 plan retains unrestricted access to the funds. Most likely you will not name yourself as owner, since maintaining ownership is not your goal, and other potential contributors may feel the funds are not being adequately protected. Instead, you might name the child's surviving parent or guardian as account owner, trusting that he or she will use the account as you intended.
Alternatively, you could establish the account under your state's Uniform Transfers to Minors Act, or UTMA, which mandates that you or any other named custodian ensure the funds are used only for the benefit of the child. The custodianship will terminate when the child reaches the age of 18 or 21 and the direct ownership of the account, along with its remaining assets, will pass to that beneficiary.
I'm aware of other instances of family members, friends and neighbors coming together to establish and fund 529 accounts for children who have lost parents. In fact, not too long ago I received the following letter from Lynne Ward, Director of the Utah Educational Savings Plan, or UESP, Utah's 529 savings plan, in response to another article I had written on this topic:
"We (UESP) had a similar account set up about a year ago. We had a new account set up for a non-Utah 2-year-old. We received numerous contributions for relatively small amounts and couldn't figure out what was going on. It didn't seem like they would have been birthday gifts as there were so many. The quarterly statement had to be manually intercepted and mailed in a large envelope as it was pages and pages long.
Months later, we received a 1099 from a major corporation. Upon following up with the company on why we had received it, we found out that it was for a contribution made by the company for the above account. The father was an employee and had died. The UESP account was set up by an aunt or other trustee for this little boy. Every time I think about this, it brings tears to my eyes. What a loving thing to do for this little boy who lost his father at such a young age. It reinforces the value of 529 plans as a vehicle to help children."