 Creating
college fund for deceased friend's child
|
 Dear College Money Guru,
A good friend of mine recently passed away, leaving behind a 3-year-old
son. We would like to set up some sort of college savings fund in
order to offset the cost of his university education, but we're
uncertain about how to proceed. What would you suggest?
-- Emory
 Dear
Emory,
One approach would be to hire an attorney to help you in establishing
a trust that names the child as beneficiary. The terms of the trust would control
the use of funds -- in this case to pay for the beneficiary's college expenses.
You could name yourself as trustee, or look to a bank, trust company or other
professional fiduciary to fill that role. The trustee would be responsible for
investing the trust's assets, filing the trust's tax returns and making the appropriate
distributions.
The effort and expense of establishing and maintaining
the trust can be substantial, and I'm guessing the amount you are contemplating
is not enough to justify that expense. A 529 plan may be a better alternative.
With a 529 plan, an account could be set up for your friend's child, and contributions
to the account could be made by you and others who wish to help fund it. The 529
account would grow tax-deferred and be distributed tax-free for the beneficiary's
qualified college costs, thereby avoiding income taxes. An
important consideration, should you decide to use a 529 plan, is naming someone
as "account owner." The account owner in a 529 plan retains unrestricted
access to the funds. Most likely you will not name yourself as owner, since maintaining
ownership is not your goal, and other potential contributors may feel the funds
are not being adequately protected. Instead, you might name the child's surviving
parent or guardian as account owner, trusting that he or she will use the account
as you intended. Alternatively, you could establish the account
under your state's Uniform Transfers to Minors Act, or UTMA, which mandates that
you or any other named custodian ensure the funds are used only for the benefit
of the child. The custodianship will terminate when the child reaches the age
of 18 or 21 and the direct ownership of the account, along with its remaining
assets, will pass to that beneficiary. I'm aware of other
instances of family members, friends and neighbors coming together to establish
and fund 529 accounts for children who have lost parents. In fact, not too long
ago I received the following letter from Lynne Ward, Director of the Utah Educational
Savings Plan, or UESP, Utah's 529 savings plan, in response to another article
I had written on this topic: "We (UESP) had
a similar account set up about a year ago. We had a new account set up for a non-Utah
2-year-old. We received numerous contributions for relatively small amounts and
couldn't figure out what was going on. It didn't seem like they would have been
birthday gifts as there were so many. The quarterly statement had to be manually
intercepted and mailed in a large envelope as it was pages and pages long. Months
later, we received a 1099
from a major corporation. Upon following up with the company on why we had received
it, we found out that it was for a contribution made by the company for the above
account. The father was an employee and had died. The UESP account was set up
by an aunt or other trustee for this little boy. Every time I think about this,
it brings tears to my eyes. What a loving thing to do for this little boy who
lost his father at such a young age. It reinforces the value of 529 plans as a
vehicle to help children." I couldn't agree
more. | 
