Last week I led you to a brief encounter with Section 529 investment plans that help parents and others finance a person's higher education. This week, I'd like to compare a few ways in which the 529, the 529 Prepaid option, and UGMA (Uniform Gifts to Minors Act) compare and contrast, especially in regard to issues about control. As I mentioned last week, plans for higher education investments could be compared to how we managed our portfolios. Diversity and long-term foresight and discipline can help you to leave an educational legacy for your children or for children other than your own.

Issues about control play a huge part in all these investment plans. For instance, federal law prohibits an investor from having direct control over the selection of specific investments in the Section 529 plan. As an alternative, state and the investment managers typically offer a large number of savings options for the investor to choose from when they open an account. Additionally, if someone outside the family promises to save for your child's education, those savings may amount to zero, zip, nada if the owner of the account decides to switch beneficiaries or to dissolve the account despite penalties attached to that latter decision.

If you go to the page on 529 Prepaid plans offered by the College Savings Plan Network, you'll discover that 529 Prepaids are very similar to Section 529 plans in that anyone can donate to these investment vehicles, the plans can be rolled over in most cases, and most colleges accept the monies. However, the 529 Prepaid programs allow you to lock into the tuition price that is charged at a state's public universities in the year when you enroll in the program. Both plans could offer tax benefits, but be aware that the state in which you reside and the amount of money that you own - among other factors - could alter these benefits at any given time.

The 529 Prepaid contains similar drawbacks as the Section 529 as well, as the account purchaser maintains control over all of the money in the account and only he or she can request account changes or refunds. The student beneficiary or the parents or guardians of the beneficiary have no control over an account unless he or she is also the designated purchaser/owner. While a story about a person who walks away with promised education funds might make a great script, in reality this scenario could break hearts and alter futures.

Two ways to overcome insecurity about someone who might walk away with a minor's financial abilities to attend college include: 1) Maintain an account for the minor and ask others to contribute directly to that account rather than trust someone else to open and maintain a separate account; and 2) Set up a way for the minor to own financial properties such as securities. The latter option includes the UGMA, which is superceded by the Uniform Transfers to Minors Act (UTMA) in some states. Trusts also figure into this picture.

The UGMA/UTMA setup is regulated by the IRS, and this institution allows a person to give financial properties (including cash) to minors without tax consequences and without the involvement of an attorney to establish a special trust (although the donor must appoint a custodian or trustee). The UGMA/UTMA is similar to any other trust, except the terms of the trust are set in state statutes instead of being drawn up in a trust document.

Little alarms might sound in your head when you read the above paragraph. If you plan to give a large amount to a minor, why in the world would you do it without an attorney? Additionally, if you read further about the UGMA/UTMA (plug those acronyms into your favorite search engine for a world of information about these plans), you might learn that you can't take your gifts back, that the minor has complete access to the gifts when they reach age of consent (18 in some states, 21 in others), and that they can spend the gifts however they choose. Also, if you establish a UGMA/UTMA for one child another child may be left out in the cold, because the plans often are not flexible. Another caveat to the UGMA/UTMA (and to any other large gift as well): a large financial offering may affect financial aid planning, as it may reduce the possibilities for financial aid.

Hopefully, you can see what a quandary these investment plans offer to families from any income level. What if you need the money five or ten years down the road for medical expenses or for other disasters? What if the child dies or decides to avoid college altogether? What if you want tax benefits, but you feel in your gut that the benefits won't be there when you need them most? We can't read the future and we can "what if" ourselves into frenzies; but some practical plans can help you save for a child's higher education despite the odds.

First, a diversified portfolio can form a base for your investment plans. Secondly, a will that protects your assets and your financial goals may give you some peace of mind. Enlist the help of a financial planner first and/or an attorney so that you can learn about your options. You can establish trusts, UGMA/UTMA vehicles, 529 plans, Coverdell Education Savings Accounts (ESA), Roth IRA's, and/or you can simply stuff money under your mattress. Whatever you do to save for a child's education, try to find the investment vehicle that offers you the most return for your money (ok - scratch the mattress plan), and that offers you the highest degree of control.

Last, but not least: While beneficiary designation may resonate with your higher karmic self, saving for a long life that might include health issues, retirement, and possible long-term care comes first. Yes, you might think about your future before you plan someone else's path. After all, your life and your child(ren)'s futures are intertwined, and peace of mind might be more valuable to your family at this point in time than a pre-paid college education.

Until Next Week,
Linda Goin