Continued from [1]

If you are shifting earned income (by paying your child to work for you), he or she can earn up to $3000, pay no tax on that amount, and still be claimed as a dependent on your return. But, as I explained before, the problem is that on financial aid forms parents’ assets are assessed at a 6% rate, but a child’s assets are assessed at a 35% rate. This often wipes out the advantage of shifting income into a child’s lower tax bracket. I usually do not recommend to parents to shift assets to the children unless the parents have no chance of obtaining financial aid.

What happens if you (or other relatives) have already put money in the Uniform Gifts to Minors Act accounts for your child? Unfortunately, there is not much you can do but try to use these assets up first when college costs start.

As your children grow older, I also recommend that you start to tell them that you have set aside money for them that should be used only for college. This information serves two purposes. First, many children worry about whether or not the family will be able to afford college, and this will relieve some of those worries. Second, you want your child to get used to the idea that she has some money in her name, and that it is to be used solely for education. After all, if you had suddenly discovered when you turned 18 that you had $20,000 and you could use this however you wanted, wouldn’t you be the least attempted take the money and run?

I have some clients in Cleveland Ohio who had already put substantial funds in specific accounts for their two children before they came to see me about their finances. Nancy and David had also ask their parents to contribute money to the child’s accounts at birthdays and holidays in lieu of expensive gifts. (The grandparents, of course, also gave modest presents so their grandchildren would not feel completely deprived. After all, most children could care less about college at 4, 10, or even older.)

Instead of adding new gifts to the existing college education fund, to which the children would have access at age 18, on my advice Nancy and David agreed to set up new accounts in their own names with the titles Nancy (Karen’s education) and David (Billy’s education). The titles were just so they can keep track of what money have been given for each child; the accounts are solely in the parent’s names. These new accounts will always be in their control, and if financial aid rules stay the same, only 6% will be assessed for education instead of 35% if this family were to qualify for financial aid.

A more complicated way to shift assets to your child would be in a minors trust, or a 2503 (c) trust; this is more complicated because you have to have a legal document drawn up, appoint a trustee, and file annual tax returns. In this case, the parent is usually the trustee and controls the money until the child turns age 21. At that point, the child has a window of opportunity of 30 to 60 days during which he can demand that all the assets of the trust be distributed to him.

If the student does not take advantage of this window of opportunity, the trust continues until some aged specified in the trust document when assets are distributed to the child (sees usually age 25 or so).

Ending of College Education Funding Using Income Shifting strategies [2]
This also end our series on financial aid and student loan program. You start this series on [1] of Financial Aid and Student Loans.

Related posts:

1. College Education Funding Using Income Shifting strategies [1] One of the most commonly used income tax strategies is to shift income from your higher tax bracket to your child’s lower tax bracket. You can do this with unearned (investment) or earned (job) income, and the rules differ depending both on the type of...
2. Financial Aid and Student Loans [1] Many of us will be concerned about paying for college tuition during our lifetimes; with the American economy in its current state, education more and more is becoming a family affair with grandparents, aunts, uncles, and other relatives pooling their funds to help deserving children....
3. Different Financial Aid Options and Student Loans [1] How Much Will Your Child’s College Education Cost? How much will college cost! Now that you are in a panic, relax! A substantial percentage of students receive financial aid in the forms of grants, loans, and work-study earnings. But if start by looking at how...
4. Financial Aid and Student Loans [2] Continued from [1] The problem with is that education has become so costly that it is often one of the top three most expensive undertaking in our lifetime, along with retirement and buying a home. I know many people living in Ohio who end up...
5. Different Financial Aid Options and Student Loans [3] Continued from [2] Ohio State-Level Financial Aid The second source of financial aid available is through your child’s state of residence (in our case, Ohio State) in 2007 15% of college freshmen took advantage of Ohio state aid programs. These are usually based on need...

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