Parents with lucrative careers and fat wallets—or generous relatives—may not need to worry about applying for financial aid or paying off massive student loans, but they can still use much hand-holding when it comes to college planning. 

Many are confused by the process, unfamiliar with the tax laws and unsure how to balance multiple financial goals. Young professionals who wish to start saving for their children’s education may still be digging out from their own student-loan debt. The sharp retreat in the market early this year and expectations for further declines also has many prosperous families on edge—again.

Mark Baniewicz, president and CEO of Socius Family Office in Boca Raton, Fla., helps about a quarter of his affluent clients with financial planning. Many of them have young children, and some even come to him with newborns. Socius advises on $350 million in assets for 60 to 70 clients, with discretionary authority over $200 million.

The biggest college-related question Baniewicz hears from clients is how much do they need to save. Some clients even want a specific number for how much they should be putting into a college savings account each month.

Wealthy parents, like any other parents, should think about how much they want to set as a college-savings goal, says Baniewicz. “The first question we generally ask is, ‘Do you want the kids to have skin in the game?’” he says. Most of his clients don’t, preferring to give their children an education rather than have them help pay for it. 

Baniewicz primarily uses 529 college savings plans as a savings vehicle. Parents retain control over the assets in these plans and can reassign the beneficiary if necessary. In contrast, money saved in Uniform Transfers to Minors Act (UTMA) accounts is irrevocable and children get complete control at age 18 or 21, depending on the state. So they could raid that tuition savings to buy a car, or anything else. 

Baniewicz also educates his college-planning clients on tax law. Under current gift exclusion provisions, parents who are married may each gift $14,000 tax-free every year to each of their children’s 529 accounts. If they can afford to dump $140,000 into a 529 plan the day their child is born (the joint five-year gift exclusion), they can prefund college at a 61% discount, he says.

To calculate this figure, he factors in the current average annual cost of college, $50,000, and assumes there is a 5% rate of return and 3% annual college inflation. Tuition inflation has increased at about twice the rate of the Consumer Price Index since the 1950s, he says. And currently, over a 20-year bond horizon, the bond market is forecasting inflation of 1.35% (2.42% nominal minus 1.07% real).

Baniewicz reminds clients that, like with retirement, the longer they wait to save for college, the more they have to save. He also talks to them about the tax benefits of using 529 plans. For families in the 39.6% marginal tax bracket—single taxpayers whose taxable income in 2016 exceeds $415,050 or married taxpayers filing jointly whose income exceeds $466,950—“having these assets sheltered is a really neat tool,” he says.

He also encourages careful portfolio construction. Although wealthy families can often tap other assets and current income to pay tuition bills when equities take a hit, “it’s really important to make sure you’re not setting yourself up for failure by having too much exposure at the wrong time,” he says. 

Most funds he looks at use glide paths that eliminate a student’s equity exposure after he or she turns age 15. “Look at the fine print,” he cautions. “Funds are not all created equally.” When using bonds, it’s important for savers to match up maturity dates with when the money will be needed for college, he says. 

Parents should also avoid overfunding 529 plans, says Baniewicz, because they’ll have to pay ordinary income tax and a 10% penalty on gains.

Section 529 plans have only been around since 1997, so he hasn’t seen many multi-generational wealth transfers among these plans—in other words, the transfer of unused funds from the original child beneficiary to a grandchild. But families contemplating this move have to be careful of generation-skipping transfer taxes, he says.

Family Circle

College planning is a huge focus for Martin Watkins, CEO of Salt Lake City-based TrueNorth Wealth Management, a registered investment advisory firm that manages $340 million in approximately 212 different family relationships. Watkins provides college-planning services for nearly 95% of these clients—parents and grandparents with fairly significant wealth. 

He also does college planning for the majority of his clients in Idaho, where he is the CEO of Idaho Medical Association Financial Services, a joint venture with the Idaho Medical Association that provides financial counsel to physicians and surgeons in that state.

Watkins started helping clients with college planning after Congress enacted legislation in 1997 to create federal tax advantages with 529 plans. Shortly before that, he was tapped by the Utah State Treasurer’s office to revamp its then-small college savings plan. 

“It started taking off quite rapidly, and it gave us enough scale that we could keep adding more and more services,” says Watkins, who continues to serve as a consultant and fiduciary to the Utah 529 Educational Savings Plan. It’s now one of the nation’s largest 529 plans and attracts many out-of-state investors because of its competitiveness, innovation and good ratings.

It’s common for TrueNorth’s clients to shift to saving for their grandchildren’s education as soon as they’ve paid for their children’s. “With Utah’s Mormon culture, the average age to get married is lower, so all these things begin earlier,” says Watkins, who married as a junior in college and had many friends become parents while still in college. Families aren’t just young in Utah—they’re big. 

“In some cases, grandparents have 35 [529 plan] accounts for 35 different beneficiaries,” he says.

Fortunately, the state of Utah offers a choice of three levels of power of attorney for 529 plans, regardless of whether account holders reside in the state. TrueNorth uses level two, which enables it to read client reports (the level one provision) plus change clients’ investment options twice a year. So the grandparents with 35 accounts simply receive reports to sign and don’t have to take other action.

TrueNorth also uses level-two powers of attorney to create custom glide paths for clients. “We have our own custom glide paths within the custom models that are available at Utah 529 Educational Savings Plan,” says Watkins. “They allow for tremendous flexibility.” Utah’s level-three powers of attorney, for those wondering, allow advisors to help facilitate withdrawals. 

Watkins thinks maintaining reasonable levels of equity is the only way to keep up with the high rate of college inflation. Families should carefully “dial it down,” he says, as college gets closer, and preferably not hold any equity in college accounts once a child enrolls. But if the markets are down, he may have clients continue to hold it. “The advantage of having power of attorney is we can drive this,” he says.

It also helps for families with reasonable resources to “have all their other financial ducks in a row,” he says, to provide flexibility during the college years so they can pay for it in various ways.

Watkins’ college-planning clients in Idaho differ from his Utah contingent. “I have numerous doctors who have master’s degrees or PhDs, then go back to medical school and have children all the while and debt increasing,” he says. “Then they’re out [of school and residency] and they’ve been poor for so long they want a real nice big house and nice cars. 

“Finding the money to have adequate cash reserves, be properly insured for various risks, save for college and pay down their own college debt is difficult,” he says. What makes it even more challenging, he adds, is the lack of increase in wages for doctors. 

Trade-offs are a big part of the discussions he has with clients. “My role is to be a teacher and leader and sometimes call them on the carpet,” he says, regarding what he refers to as their “pent-up consumerism.”

Most of his doctor clients have incomes far too high to qualify for financial aid regardless of how many children they have, says Watkins. So once he makes sure they have a firm foundation for themselves, he helps them start saving for college. He encourages them to save each year an amount that’s at least equal to the annual state income tax credit allowed for contributions to 529 accounts. 

For parents filing joint tax returns, the deduction is $8,000 per family in Idaho and $3,800 per child in Utah. Watkins notes that six states—Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania—are tax parity states, meaning residents may take the same deductions on home-state and out-of-state 529 plans.

He also encourages them to set these college savings on autopilot. “I have tried my whole career to automate
the prudence process,” he says. “They jump through the hoops, and we get them there.”