Planning for education costs.

• Author: Grant, Randi K.

Editor's note: Randi Grant is a member of the AICPA's Personal Financial Planning Credential Committee.

For more information about this column, contact Ms. Grant at rgrant@bdpb.com.

Education funding is often a client's primary concern. Clients see it as a certainty, more likely to happen before disability, retirement or death. In addition, the media bombards the public with very frightening statistics on higher education costs, showing them growing at rates significantly above the consumer price index.

Some clients may seek advice solely on covering the costs of education; they may approach a financial planner at any time from before their first child's birth to until he or she is in graduate school. A financial adviser, however, cannot plan for education costs in a vacuum. He or she must understand the client's income, discretionary cashflow, financial position, asset allocation and risk tolerance, as well as whether any disability and life insurance coverage is in effect.

Once an adviser gathers appropriate information, he or she can effectively design a plan for handling education costs. The most efficient approach is a "building block" design that starts with the foundation.

Insurance

A solid foundation ensures that clients will meet their broad education goals for their children. This includes ample life insurance to provide for education, in addition to other survivorship needs. A standalone term policy, with the term coinciding with the estimated completion dates of the children's educations, can be a simple and low cost solution.

State Prepaid Tuition Programs

Depending on the state of residence, a prepaid tuition program may be available. Although many clients envision their child attending an Ivy League school and dismiss the notion of an in-state campus, state-sponsored prepaid tuition programs are another way to ensure that a college education will be available; see Sec. 529(b)(1)(A)(i).

Coverdell ESAs

Under Sec. 530, clients can contribute up to $2,000 per year per beneficiary; all aggregate contributions to Coverdell education savings accounts (ESAs) cannot exceed $2,000 per beneficiary per year. Contributions are not deductible, but the accounts are tax exempt; distributions made for qualifying education purposes are tax free. The contributor is subject to a modified adjusted gross income limit, with a phaseout between $95,000 and $110,000 for individual fliers, and between $190,000 and $220,000 for joint filers.

Qualified...