Q: My niece just lost her husband and has two children, 8 and 9 years of age. Relatives are looking for a way to help fund their parochial school and college education. I have come up with the UTMA (in Michigan) as the best solution I can find. Any other guidance you might have?
A: The best funding solution for the children's education depends on a number of factors. However, I wouldn't rush into any long-term plan. There may be some short-term school funding needs that family members and friends can contribute to with the school year about to start.
But I would allow for time to pass and then see what your niece thinks is best for her family. My remarks will be general since I don't have specifics.
First, a reminder for your niece to get in touch with the Social Security Administration to file for survivor benefits. The children can also get dependent payments until they reach college age.
There's nothing wrong with an UTMA, or Uniform Transfer to Minors Act. An adult controls the custodial account until the minor reaches the age of majority while the child owns the assets.
However, a big disadvantage to an UTMA account when it comes to college is it's counted as an asset of the child in the financial aid calculation, which can sharply reduce the amount of aid they receive.
The Coverdell education savings account is an intriguing option. The limit is $2,000 annually for each child (assuming the family comes under certain taxable income limits). Relatives can put money into the Coverdell and the savings compounds tax deferred. The money is withdrawn tax free if it goes to qualified education expenses. A Coverdell can be tapped to help pay for parochial school tuition and for college.
The 529 college savings plan is restricted to paying for postsecondary education, but it's one of the easier plans to set up. The money deposited in the account is with after-tax dollars, but the savings compounds tax free and remain tax free on withdrawal so long as it goes toward qualified educational expenses.
To use the Michigan Education Savings Plan 529, as an example, the minimum contribution is $25 per beneficiary and the maximum is $235,000. There are no income limitations for participating.
You'll want to determine how much might be needed for their schooling. No point in overfunding the accounts.
Chris Farrell is senior economics contributor, Marketplace, commentator, Minnesota Public Radio.