Question: My husband and I would like to help our grandchildren put aside money for college. We are getting ready to retire and are not rich by any means, but would like to be able to give birthday and Christmas presents to each of them. What is the best type of investment for us to purchase for them that will not take away from any financial aid for which they might apply?
Answer: Unfortunately, there are no easy answers. Different colleges have different approaches to financial aid, and schools are just beginning to grapple with the ramifications of some of the newer plans, such as 529 college savings plans.
But chances are good that 529 plans will be treated more favorably than other ways of saving, such as custodial accounts or Coverdell Education Savings Accounts (formerly education IRAs), said Joseph Hurley, a certified public accountant and 529 plan expert.
Most colleges will treat 529 accounts as the asset of whoever contributed the money. When the contributor is the parent, the college will expect only a small portion of the account--typically 5.6%--to be contributed for education expenses each year, Hurley said.
By contrast, custodial accounts and Coverdell accounts typically are considered to be the student's assets, and the student will be expected to contribute 35% of those accounts each year.
If the grandparents open and fund the 529 accounts, it's possible the asset won't be counted because many colleges ask only about parent and student assets, he said. On the other hand, some colleges count every dollar of distributions from 529 and other plans, regardless of who contributed the money, and reduce financial aid accordingly.
If you want a complete discussion of this issue, check out the latest edition of Hurley's book, "The Best Way to Save for College" (2002, Bonacom Press). You also can learn more about 529 plans at www.collegesavings.org, a Web site run by the treasurers of the states that offer the plans.
As you probably can tell, no one can predict what the financial aid picture will look like when today's toddlers reach college age. If recent trends are any indication, much of the available financial aid will be loans--not grants or scholarships. So chances are that each dollar you put aside for their educations will spare them a dollar or more of debt, rather than cost them "free" money.
Living, Bypass Trusts Can Offer Tax Savings
Q: I understand the differences between a living trust, which is designed to avoid probate, and a bypass or credit shelter trust, which is designed to reduce potential estate taxes. My husband and I have wills that establish bypass trusts upon our deaths. Our new financial advisor associated with one of the big brokerage houses said we should have a living trust as well. Our attorney recommends we stick with the bypass trust but said he would be happy to make the change if it would make us "feel better." Other than the probate issue, how does one determine which type of trust to use?
A: You didn't say where you live, but your attorney's attitude is extremely distressing if you live in a state with high probate costs, such as California or New York. There are a few reasons not to have a living trust, but most people who have enough money to worry about taxes, and who live in costly probate states, should have one.
You can have both a living trust and a bypass trust. What the living trust replaces is your will. All the provisions that are currently part of your will would be incorporated in the living trust document.
First, a few definitions. A living trust is designed to avoid probate, the court process that otherwise follows death. In states such as California, probate costs typically eat up 3% to 4% of the total value of the estate.
Probate also is a public process, so anyone can check court records to see how much money you had, who your creditors were and how you distributed your estate. Living trusts allow you to avoid those costs and keep the details of your estate plans from the public eye.
Living trusts do not, in themselves, reduce estate taxes. But most living trusts have provisions in them to create other trusts after death, such as bypass trusts, that are designed to cut down on future estate taxes.
Bypass trusts work by setting aside an amount of money--typically equal to the prevailing estate tax exemption limit--when the first spouse dies. (This year the limit is $1 million, so if one of you died this year, $1 million of your assets typically would be placed in the trust.)
This money is allowed to grow during the surviving spouse's life, and transfers free of future estate taxes to the heirs, typically the children, when the surviving spouse dies.
If you're not sure whether you should have a living trust, your best bet may be to hire an attorney who specializes in estate planning. This is a difficult and complex field that probably shouldn't be left to the good old family retainer. Your local bar association can offer you referrals to certified estate-planning specialists.
Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at money email@example.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times' Web site at www.latimes.com/moneytalk.