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529 Plans Versus 2503(c) Trusts

Also, the lowdown on FAFSA simplification.

Susan T. Bart, 08/28/2009

College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to advisorquest@morningstar.com.

My June column noted that one item discussed in the Middle Class Task Force's Staff Report "Financing the Dream: Securing College Affordability for the Middle Class" was the complexity of the Free Application for Federal Student Aid (FAFSA) form. The New York Times described FAFSA as "a notoriously complicated form that asks students seeking financial aid for college as many as 153 questions."

"Change" will happen next year, the Obama administration announced on June 24, 2009. At a press conference on that date, Secretary of Education Arne Duncan and IRS Commissioner Douglas Shulman promised that next year's form will reduce the number of questions and allow students to link to an IRS Web application that would provide some of the information they need to complete the FAFSA. Duncan said something I've waited all my career to hear; he stated that on this project the IRS has "moved at lightning speed." It seems that the "yes we can" mentality infiltrated the IRS!

The promised changes include a 20% percent reduction in the number of questions (there would still be 120 or so questions to answer) and a fifty percent reduction in the number of Web pages to navigate. The IRS link, which is expected to be operational in January 2010, will allow applicants to hit a button to request their IRS data. The link will connect with the IRS Web site and provide the applicant the exact tax data needed for the FAFSA.

Secretary of Education Arne Duncan would like to make further changes to eliminate more than one-half of the questions, but Congressional approval would be required. Substantive issues of financial qualification for aid lurk behind these discussions. Some would eliminate questions about family savings for college. For example, Margaret Spellings, secretary of education in the Bush administration, had proposed eliminating all financial data except adjusted gross income and the number of tax exemptions. Others argue for expanded financial questions that would better assess true financial need, although probably not contribute to FAFSA simplification.

529 Savings Plans Versus Alternative Ways to Make Gifts to Minors: 2503(c) Trusts

Last month I compared 529 savings accounts with Uniform Transfers to Minors Act accounts. This month I will compare 529 savings accounts with another alternative way of making gifts to minors, gifts to 2503(c) trusts.

Background. Usually gifts to a trust do not qualify for the gift tax annual exclusion because the trust beneficiary does not have the "present interest" required for the gift tax annual exclusion. Typically a trust beneficiary only has a future interest in the trust property. Section 2503(c) of the Internal Revenue Code creates an exception to the present interest rule and permits gifts to a 2503(c) trust to qualify for the gift tax. Annual exclusion gifts to a 2503(c) trust will also qualify for the GST annual exclusion.

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