Category: Smart Money Tips

If you missed the first post in this series, find it here: “Getting Started Simply: How the College Financial Aid Process Works“

When should you start financially preparing for college? I recommend at least ten years ahead of time. At this point, we don’t know what your total college expenses might be, but we do know they will likely be significant. Additionally, many people are entering their prime earning years when their children start college, so they may have a painfully high expected family contribution (EFC). Starting to save early is paramount to a successful college funding strategy.

One way to help motivate regular savings is this fact: You have the choice of saving now and earning interest, or borrowing later and paying interest. The average annual cost of a private college in 2025 is expected to be $65,509. Public universities are expected to be $31,189! Clearly, benefitting from the power of compound interest in a college savings fund can help. For example, $4,000 invested in the market earning an average return of 7% would be worth $7,869 in 10 years. If you saved $4,000 annually for 10 years at this return, your college fund would have $59,134!

What are the most common choices for college savings accounts?

• Taxable investment accounts: These accounts have no tax-deferred growth treatment, but have the most investment flexibility.
• Trusts: If you have no chance of receiving financial aid at all, a trust for the benefit of your child can be an appealing tool since they lower your overall estate, allow some control, and have flexibility of investment choices.
• Qualified State Tuition Programs (529 Plans): These tax-deferred savings plans come in two different types: prepaid tuition plans and tuition savings accounts. This program is the most common type of college savings plan I set up for my clients, so I will devote my next blog specifically to 529 plans.
• Coverdell Education Savings Accounts: These accounts only allow annual contributions up to $2,000 per child (subject to income limits), but can also be used to pay for private elementary and high school tuition, among other things.
• Your home: Some colleges recognize mortgage debt in their financial aid calculations, so aggressively paying down your mortgage and borrowing against your home equity can be an effective strategy.

For those who wish to delve deeper into this, here are two great resources I rely on and recommend to clients:

• Paying For College Without Going Broke, 2015 Edition by Kalman A. Chany
• TheCollegeSolution.com, by Lynn O’Shaughnessy

This first post in our series on paying for college provides a brief overview of the basics, including how your “need” is calculated. In future posts, we will examine the financial aid process in more depth and give you pointers on how to try to get the most aid for which you are eligible.

 The cost of a four-year private college education has surpassed $150,000 at many schools. Even the public Ivies—state schools with excellent reputations—can run in excess of $200,000. In spite of these facts, there are billions of dollars of financial aid available for which many families can qualify. Those who qualify for the most aid are not necessarily those with the most need; it is those who best understand the rules of the financial aid process. Financial aid is a negotiation. The financial aid officer’s job is to obtain as much money from you as possible, and your job is to make sure you get a fair deal.

Each year of college, you will be required to complete the Free Application for Federal Student Aid (FAFSA), as well as the PROFILE form for some colleges. These forms are even more detailed than your taxes and are used to determine your Expected Family Contribution (EFC), or how much income and assets they believe you and your student can afford to put toward college.

Costs you can expect from a college education include: tuition and fees, room and board, personal expenses, books, and travel. The difference between the total of these costs and your EFC is called your “need.”

No matter to what school you apply, your EFC should be roughly the same. Your need may change due to the difference in the price of each school. To help you meet your need, each school determines how badly they want to enroll your student and offers you a financial aid package consisting of the following:

• Grants and Scholarships: typically, tax-free money that doesn’t have to be paid back;
• Federal Work Study: a federally subsidized student work program; and
• Student Loans: federally subsidized government loans taken out by the student that generally have no interest until after leaving college.

The aid package you initially receive may be unacceptable or unaffordable to you. However, you may still be able to negotiate a better deal with the financial aid officer if you understand the financial aid process.

For those who wish to delve deeper into this subject, I recommend these two great resources to clients:

• Paying For College Without Going Broke, 2015 Edition by Kalman A. Chany
• TheCollegeSolution.com, by Lynn O’Shaughnessy

Estate planning can be a minefield of potential missteps, some of which could have far-reaching consequences. Many of the poor choices individuals make when planning for their own future or passing assets to their families are caused by “one-size-fits-all” planning strategies or well-intended advice from family or friends. Following are some common and potentially costly mistakes along with suggestions for avoiding them.

Failing to plan. Whether drafting a basic will or crafting an elaborate strategy involving trusts and tax planning, an estate plan can help reduce estate taxes, save on estate administrative costs and specify how your assets are to be distributed. Today, the majority of Americans have no will. If you die without one, your estate will be divided according to the intestacy laws of your state — not according to your wishes. This could create problems if your intended beneficiary is a minor child, a child with special needs, a favorite charity, or a combination of the above. In these cases, you need a will that details each contingency and a trust or multiple trusts to accomplish your goals.

Not maximizing your marital estate exemptions. Perhaps one of the most important pieces of tax legislation passed recently is referred to as the “portability” provision. This means that if one spouse dies without using up his or her federal estate tax exemption — $5.43 million in 2015 — the unused portion may be transferred to the surviving spouse without incurring any federal estate tax.

How might the portability provision work in a real life situation? Consider the following scenario involving the hypothetical $8 million estate of Jim and Helen:

If Jim dies in 2015, the executor of his estate can elect to use the unlimited spousal exemption and can also transfer Jim’s unused $5.43 million federal estate tax exemption to Helen. If Helen dies in 2015 with $8 million in assets, her estate will have a total of $10.86 million in federal estate-tax exemptions: the $5.43 million exclusion transferred from Jim and her own $5.43 million exclusion. As a result, none of Jim and Helen’s $8 million estate would be subject to federal estate tax.

As welcome as the portability provision may be, it still does not account for future appreciation of assets from the first spouse’s estate. Nor does portability offer protection from creditors and others aiming to lay claim on an estate’s assets. Traditional strategies like credit shelter trusts and bypass trusts do provide these benefits and therefore are still essential planning instruments for married couples.

Naming a family member as executor. Your executor is the person who will be responsible for administering your estate after death. The responsibilities of an executor are serious, and you will want someone who will take them seriously. There are many important reasons to choose a paid executor — a bank or trust company, for instance — along with (or instead of) a spouse or family member. A professional executor is familiar with the probate process and may actually save the family money, keeping expenses under control. This will undoubtedly be an emotional time for your loved ones, and a family member may find it difficult to focus on the details involved with settling an estate. In addition, when you name a family member, especially a beneficiary as executor, you introduce the potential for conflict of interest. The larger the estate, the more likely those conflicts become.

Relying on advice from family or friends. Would you go to a friend or relative for surgery or to fix your car if he or she was not a skilled surgeon or auto mechanic? Why would you take their advice about estate planning issues if they are not professional planners? When seeking a professional, look for a specialist — someone who knows trusts, estate tax law, and probate issues. A specialist will have more experience and skill in his/her chosen area — and that will translate into higher quality services provided in the most cost effective manner.

No set of rules or advice can apply in all cases, but a sure way to avoid these and other problems is to rely on a trusted team of tax and legal professionals led by your financial advisor.

This communication is not intended to be tax and/or legal advice and should not be treated as such. Each individual’s situation is different. You should contact your tax/legal professional to discuss your personal situation.

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