Weiss Capital Securities, Inc.

Custodial, 529 and Coverdell Accounts

What is a Custodial Account?

Because most states do not allow minors to own stocks, bonds, mutual funds and other investment vehicles, custodial accounts allow an adult to open an account for the benefit of a minor. They feature tax benefits and the flexibility to invest the way you want. The two most common custodial accounts used for education are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA).

The Uniform Gift to Minors Act established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. A state statute instead of a trust document establishes the terms of this trust. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance. UTMA is slightly more flexible than UGMA.

By establishing either of these custodial accounts, the donor irrevocably gifts the money to the trust. The money then belongs to the minor, but is controlled by the custodian until the minor reaches the age of trust termination - either 18 or 21, depending on the state and whether it is an UGMA account or an UTMA account. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor.

Any income generated from the custodial account must be reported on the child's tax return and is taxed at the child's rate. The parent is responsible for filing an income tax return on behalf of the child. There is no special tax treatment for UGMA accounts. Children aged 14 and older must sign their own tax returns.

Custodial accounts are an irrevocable gift to the minor. You can gift up to $11,000 per year without incurring gift taxes and initial contributions are tax free. Custodial accounts have no income limits and money can be withdrawn at any time for the benefit of the minor. You also have the flexibility to invest in stocks, bonds and mutual funds.

What is a Coverdell Education Savings Account?
(formerly Education IRA)

The Education IRA has been renamed the Coverdell Education Savings Account (ESA). The Coverdell ESA was created to give individuals a method to save for a child's education (both elementary and secondary education [k-12] and post-secondary education [college, graduate school, vocational school, etc.] and may be established for the benefit of any child under age 18.

Eligibility requirements

Account must be established for the benefit of a child (designated beneficiary) under the age of 18. Contributions to the account will not be accepted after the designated beneficiary reaches his or her 18th birthday, unless the beneficiary is a special-needs beneficiary.
You may contribute up to $2,000 annually to a child's Coverdell ESA if your modified adjusted gross income* is less than $95,000 as a single tax filer, or $190,000 to $220,000 as a married couple filing jointly in the tax year in which you contribute. The $2,000 maximum contribution limit is gradually reduced if your modified adjusted gross income exceeds these limits. *Your gross income from all sources (including wages, salaries, tips, taxable interest, dividend income, alimony, capital gains [losses], increased and decreased by certain adjustments (not including itemized deductions). Consult with your tax advisor for additional information.

Contribution Limitations and Deadlines

You can make annual contributions to a Coverdell ESA from January 1st through the tax-filing deadline (excluding extensions) for the year, generally April 15.

Anyone may contribute to a child's Coverdell ESA, as long as his or her income falls within the income guidelines and the total of all contributions for one beneficiary does not exceed the $2,000 limit.

The annual amount you can contribute to a Coverdell ESA is dependent on your modified adjusted gross income as determined on your federal income tax return. The following table should help you determine whether or not you are eligible to contribute to a Coverdell ESA:

For Tax Year 2005 - 2010	Modified Adjusted Gross Income*
Your tax filing status	Full contribution	Partial contribution	Not eligible
Single/Head of Household	Up to $95,000	$95,000 - $110,000	Above $110,000
Married Filing Joint	Up to $190,000	$190,000 - $220,000	Above $220,000

*Your gross income from all sources (including wages, salaries, tips, taxable interest, dividend income, alimony, capital gains [losses], increased and decreased by certain adjustments (not including itemized deductions). Consult with your tax advisor for additional information.

Tax Advantages

All earnings in the account accumulate on a tax-deferred basis and can be withdrawn from the account tax free if used to pay for qualified education expenses.

Distribution Guidelines

To avoid taxes and penalties on earnings, distributions must not exceed the amount of qualified education expenses for the year in which they are taken.

All funds in the account must be distributed to the designated beneficiary 30 days after his or her 30th birthday, unless the beneficiary is a special-needs beneficiary. If the assets are not going to be used for the designated beneficiary after he or she attains the age of 30, the balance of the account can be rolled over to a Coverdell ESA for another designated beneficiary who is also a qualified family member under the age of 30.

What is a 529 Plan?

Tax benefits are one of the reasons why saving for college with the Weiss Capital Securities 529 College Savings Plan makes sense. Money in the account grows tax deferred and all qualified withdrawals for higher education expenses are also tax free. Also, money in a 529 plan is excluded from your taxable estate. For estate planning purposes, the Weiss Capital Securities 529 College Savings Plan is an excellent way to remove money from your estate while helping a loved one afford a college education.

Section 529 college savings plans have many qualities that make them ideal tools for accumulating money to be earmarked for college - particularly their unique array of potential tax benefits:

investment earnings grow tax free
qualified distributions are tax free
you may be eligible to claim a state income tax deduction
contributions are considered gifts by the IRS, potentially lowering the taxable value of your estate

Accelerated Gift Tax Treatment; Favorable Estate Tax Treatment

529 plans qualify for special gift-tax exclusion. Lump-sum contributions of up to $55,000 per beneficiary can be made free of gift taxes ($110,000 for a married couple) to an unlimited number of beneficiaries - that's five times the annual gift tax exclusion. Once the maximum gift contribution is made, however, the contributor may not make any additional gift contributions to that beneficiary for five years, or consider annual contributions of up to $11,000 per beneficiary (or $22,000 for a married couple), which are also qualified contributions for the gift tax exclusion.

Assets held in a 529 plan are generally not subject to estate tax. That means any contributions made to the plan, in fact, your entire account value if you are the only one funding the account, is not included in your estate.

If you use the special lump-sum exclusion and die before the end of the five-year period, the portion of the contribution allocable to the years remaining in the five-year period, beginning with the year after your death, would be includible in your estate for federal estate tax purposes. For more information on how a 529 plan can help with estate planning, speak with your tax advisor or estate-planning attorney.

Compare and Select Which Plan is Best for You
Features	Custodial Account	529 Plan	Coverdell ESA
Beneficiary Age Limit	Age 18 or 21 depending on state	No age limit	Age 18 for contributions, 30 for distributions
Beneficiary Changes	Beneficiary Changes Contributions are considered irrevocable and must be used for the benefit of the minor	Change any time to any member of original beneficiary's family including self	Change any time by transferring balance to Coverdell ESA of beneficiary's family member
Maximum Contribution	Unlimited	Up to $294,000 per beneficiary, adjusted annually	$2,000 per year; donor must meet income limits below
Who Controls the Assets?	The custodian has full control until the minor reaches age of ownership (18 or 21)	Owner	Owner
Income Limit for Plan Contribution	Unlimited	Unlimited	Phase out of contributions: single filers $95,000 - $110,000; joint filers $190,000 - $220,000.
Taxation of Earnings	First $750 is federally tax exempt, second $750 is taxed at minor's rate, over $1,500 is taxed depending on age	Federal tax free if used for qualified education expenses by a student enrolled at least part time at qualified institution; state tax advantages vary	Withdrawals are free of federal income taxes, if used for qualified elementary, secondary, or post-secondary educational expenses; state tax advantages may vary
Estate/Gift Tax Guidelines	Contribute up to $11,000 per year. Value excluded from estate.	Individuals can contribute up to $55,000 ($110,000 if married and filing jointly) per beneficiary, once within a 5-year period without triggering gift taxes ²; Generally, donor does not include account in estate ¹	No advantages; account assets part of owner's estate
Withdrawal of Assets for Use Other than College	Assets may be used for any purpose to benefit the minor, not just education	Earnings only; taxed as ordinary income at owner's rate and subject to 10% penalty	Earnings only; taxed as ordinary income at beneficiary's rate and subject to 10% penalty; assets remaining when beneficiary turns 30 subject to tax and penalty ³

1 The tax legislation exempting earnings on qualified withdrawals from federal income tax expires on 12/31/10, requiring Congress to enact further legislation to allow these provisions to remain in effect past 12/31/10.

2 If the account owner takes advantage of the five-year gift tax averaging rule and dies within five years of the funding date, the account owner's estate will include a portion of the assets contributed.

3 Coverdell withdrawals may be used to pay for qualifying elementary- and secondary-school expenses, as well as college.