EGTRRA provisions affecting PFP.

AuthorGrant, Randi
PositionEconomic Growth and Tax Relief Reconciliation Act of 2001 - Personal financial planning

A financial planner's mission is to help clients identify and achieve their goals. This includes tax planning, retirement planning, estate planning and risk management. Last summer, Congress enacted the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which gave financial planners several new options and possibilities to consider for their clients. While the EGTRRA repeals certain key provisions in 2010, financial planners should apply

the Code as it reads today. Experience indicates that the only thing certain about tax legislation is uncertainty. (Congress is already considering newer tax legislation, which might be enacted before this column appears.) Given this, diligent monitoring is essential to good financial planning. Planners should review and probably revise all existing financial plans, as significant changes might render existing plans obsolete.

Education Planning

Sec. 529 plans. Qualified tuition plans under Sec. 529 are attracting considerable interest. They are a powerful planning opportunity--plan assets grow tax-free and distributions are tax-free, provided taxpayers use the distributions to pay for qualified higher education expenses. Taxpayers can claim Hope or Lifetime Learning credits for the same year in which they make distributions from Sec. 529 plans, as long as they do not use the distributions for the same expenses for which they claim the credit. The EGTRRA expands the definition of family member to include first cousins, and eases the tax-free rollover rules. In effect, this gives grandparents more incentive to fund Sec. 529 plans.

Brokerage firms and state legislatures have been quick to provide a myriad of investment options, creating adviser-class shares for which a financial planner (with the appropriate securities licenses) may be compensated, legislating new plans and increasing funding limits.

In accordance with state law, many clients have established Uniform Gift to Minors Act (UGMA) accounts to fund education. Existing UGMA accounts should be used to pay for elementary and secondary school education, summer camp, vacations and other allowable expenses; taxpayers can, in turn, use the funds that were earmarked for these expenses to fund a Sec. 529 plan.

Alternatively, certain plans allow plan participants or account owners to act as an UGMA account. Financial planners should be mindful, however, of a beneficiary's rights to the account on reaching majority. Certain plans also allow...

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