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Ownership. Account holders/participants can be individuals, partnerships, corporations, trusts, estates or nonprofit organizations residing and paying taxes in the U.S. (no joint ownership). Also, beneficiaries and account holders can be the same person, with no age limit.
|Investment and Insurance Products:
• Are Not insured by the FDIC or any other federal government agency
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate
• May Lose Value
Contributions. Treated as a completed, present-interest gift, which qualifies for the annual gift tax exclusion (currently $13,000.) A special election allows a current $65,000 gift to be treated as if made over the next five-year period, free of gift tax. If the donor dies within five years following the special election, the portion of the contribution allocated to calendar years beginning after the contributor's death is included in the donor's gross estate. There are no income restrictions on the individual contributors. However, only cash contributions are allowed.
Distributions. Not taxed if made on behalf of a beneficiary for qualified higher education expenses (tuition, fees, books, supplies and equipment, room and board). If distributions are for non-qualified expenses, earnings are subject to federal income tax, typically at the account owner's rate, as well as a 10% federal penalty.
Control. Gifts are revocable. The account owner (exclusively) may withdraw funds at any time, but earnings on non-qualified withdrawals will be taxed at the current income tax rates (both federal and state), plus there is a 10% penalty on the earnings
Investments. Once money is invested, the account holder may change investments directly or indirectly only once a year (or with each change in the designated beneficiary).
Successors. If the account holder/participant dies, assets pass to the successor account holder/participant. If there is no living successor, assets pass to the beneficiary – or the parent can name a new account holder. Assets will not be included in the account holder's estate (see chart on following pages for exception) unless the holder is also the beneficiary. If the beneficiary dies – and no successor beneficiary has been designated - assets will be distributed to the beneficiary's estate. The non-qualified withdrawal penalty of 10% on earnings does not apply in the event of death or disability of a beneficiary, but earnings are subject to income tax.
Changes. If the beneficiary does not use all funds in the account for qualified educational expenses, funds may remain in the account for the beneficiary should he or she return to college in the future. If the beneficiary does not return to college, another member of the beneficiary's family may be designated as beneficiary. Money may be withdrawn from the account, but is subject to income taxes and 10% penalty.
Rollovers. The account holder can roll one state's qualified state tuition program into another state's program with no tax ramifications. Rollovers can be done directly between the two plans or indirectly, as long as assets are placed in a qualifying state tuition program within 60 days of initial disbursement. The beneficiary of a rollover must be a member of the family of the beneficiary of the transferred account.
Scholarships. If the beneficiary receives scholarships, the non-qualified withdrawal penalty of 10% on earnings does not apply to distributions up to the amount covered by scholarships, but earnings are subject to income tax.
Financial Aid. Although policies vary among different colleges, QTPs are treated as assets of the account holder, not the student beneficiary. The Expected Financial Contribution (EFC) is calculated based on data submitted to the U.S. Department of Education on the Free Application for Federal Student Aid (FAFSA) form. Assets are not considered at all if the family qualifies for the "simplified EFC formula".
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Important Notice: City National Securities, as a matter of policy, does not give tax, account, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies before implementation.
City National Securities provides advice on several pre-screened programs to help you implement this tax-advantaged technique. For further information, please contact us at (800) 280-1464.