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.

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