Education saving doesn't have to be all in the family
Q My husband is the godfather of his cousin's child. We would like to start some sort of education account for this child. We do not want this fund to be a tax burden either to us or to the child's parents. Also, would it be possible for others to contribute to the fund?
L.K., Falls Church, Va.
Q We wanted to give an education gift to the baby of the custodian of our church. How does a nonrelative give a financial gift to a newborn that is protected for the child's exclusive use?
B.D.H., via e-mail
A In both scenarios above, there are at least three ways to contribute to the education of a nonfamily member, says Pat Schipper, a consultant with Prism Financial Group, Overland Park, Kan.
1. Set up an education IRA. A third-party can be a "contributing party" to such an account, says Ms. Schipper, even setting it up. But a parent or guardian must be the designated "responsible party" for the account - in other words, the account guardian. Check with the IRA provider to make certain you can set up such a plan.
2. Contribute to a 529 tax-sheltered education plan. Many states now offer them. Check with the plan administrator in the state of your choice to see whether you can actually set it up, or can only contribute to the plan, Schipper says. Also check to see if others (4th parties) can contribute.
3. Buy US savings bonds earmarked to the child. You will not be able to take tax benefits on your contribution, as you might with the two other options. But you can still set money aside for the child.
Q For our IRAs, we used to be told to list individual beneficiaries instead of showing a living trust as beneficiary. Now my attorney tells me to list the trust as beneficiary because of an IRS private-letter ruling that considered such a trust [legal], and that the children benefiting from the trust would be able to take the money out of the IRA over their lifetime, instead of all at once when the trustee dies. Is this correct?
B.A., Rancho Palos Verdes, Calif.
A "That was a ruling in 1997," says IRA expert Ed Slott in Rockville Centre, N.Y. But "under current IRA rules," he says, "you only need list your beneficiaries." They can "stretch out" the money over time.
Remember, he says, if you set up a trust, it must qualify under very strict IRA rules. "It's easier to just name the beneficiaries."
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