2013-02-22 / Columnists

Spotlight On Elderlaw

Commentary By Nancy J. Brady, RN, Esq. And Linda Faith Marshak, Esq.

This time of year, when we are all gathering information to prepare for the annual tax return, is the best time to look at one’s retirement and estate planning. Retirement planning should optimally take place over a span of one’s working years, with adjustments made for life changes, volatile market conditions, as well as consideration of the number of working years remaining. Estate planning also takes place over a span of one’s lifetime, and after retirement, with adjustments made for changes in one’s circumstances. For these reasons, it makes sense to meet with your accountant, financial planner and estate planning attorney for the most comprehensive planning with input from all of the professionals working for you.

Obviously, the focus of retirement planning is to ensure adequate income for one’s lifestyle through the “golden years”. The focus of estate planning is to minimize estate taxes to be paid by your loved ones after you’re gone, as well as planning to preserve assets by planning to finance potential long term care costs. Often these two objectives have to be balanced, which is where the input of the estate planning attorney, accountant and advisor as a team approach is most beneficial.

When you visit with your professionals, for estate tax planning purposes, some gifting may be part of the plan. College savings plans are a great way for grandparents, parents, or other relatives to help loved ones offset the cost of education, and for the person making the gift to receive some tax benefits. The following are a few of the most popular plans available to those who would like to make gifts to grandchildren for education purposes as part of an overall plan.

Qualified Tuition Programs (Section 529 Plans): A 529 Plan is an education savings plan, designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996. There are two types of 529 plans, operated by either an individual state or educational institution; prepaid tuition plans, which lock in future rates at the current tuition rate, and college savings plans, which allow saving and investing for higher education free from federal and (almost all) state taxation.

529 plans offer unsurpassed income tax breaks. Although your contributions are not deductible on your federal tax return, your investment grows taxdeferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006. Additionally, the funds in a 529 prepaid tuition plan are not counted as an asset in the financial aid process.

New York’s 529 Plan is called the New York College Savings Program. If you're a New York resident, you may be entitled to a generous state income tax deduction of up to $5,000 ($10,000 for married couples filing jointly) on contributions to your Direct Plan account per year. Additionally, a donor may “frontload” up to five years of gift tax annual exclusions into the plan ($14,000 per year, $70,000 in total), which allows the funds to grow tax-free while the donor removes up to $70,000 from their estate. Savings Bonds: The U.S. Government offers a savings bond tax exclusion, which permits qualified taxpayers to exclude from their gross income all or part of the interest paid when eligible Series EE savings bonds and Series I savings bonds are redeemed. The bonds must be issued after 1989 and the bond owner must use the funds to pay for qualified higher education expenses at an eligible institution.

There are income limits imposed for bonds issued for these purposes. (For 2011 the income phase-outs were $70,100 to $85,100 for single filers and $105,100 to $135,100 for joint filers.) It is important to note that in order to reap these benefits, the bonds must be issued in the name of a taxpayer age 24 or older at the time of issuance. If a relative wishes to purchase a bond for the benefit of a child, the bond must be registered in the name of the relative. The child may be the beneficiary of the bond, but may not be listed as a co-owner.

Coverdell Education Savings Accounts (ESAs): These accounts were formerly known as Education IRAs and serve as an incentive to help parents and students save for education expenses. While contributions to a Coverdell ESA are not deductible, the amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses (such as tuition, fees and required books) at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses. There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution.

The beneficiary of these accounts must be under the age of 18; funds can no longer be contributed once the minor reaches 18. The funds are not limited to use for college, and may also be used for elementary and secondary education. While there is an annual limit imposed per beneficiary of $2,000 in contributions toward these accounts, the funds in and ESA are “owned by the beneficiary and not the donor for estate tax purposes.

UGMA & UTMA Accounts: One of the simplest and most common ways to save for education is to create an account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts allow adults to establish accounts on behalf of minors and are generally set up at a bank or brokerage firm. By establishing an UGMA/UTMA for your child or another minor, you are handing over any assets you contribute to the account.

It is important to note that once the beneficiary reaches the age of majority (18 in New York, 21 in some other states), he or she has an absolute right to the funds in the account. While these accounts are set up with the hope that the beneficiary will use the funds for educational costs, there is no guarantee that the beneficiary will use the funds in accordance with the wishes of the custodian. Under current law, the first $950 of earnings on the account are tax-free, the next $950 are taxed at the child's rate, and earnings beyond that are taxed at the parents' rate.

Please consult your estate, financial and tax planning professionals before establishing any of the aforementioned accounts as part of an overall plan.

The attorneys can be reached at 1-718-945-7777 or 1-718-738-8500.

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