Education Funding at Merrill Lynch

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1 Education Funding at Merrill Lynch

2 Which will grow faster: children or their education costs? If you want to help fund a loved one s education expenses, several excellent options are available. Some of these options also can provide you with an effective way to remove assets from your taxable estate for estate tax purposes. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed 2 May Lose Value

3 The Dilemma: What options are available for funding a child s education? Because traditional taxable investments may not be the most effective way to invest for college, you should consider: Section 529 Plans Coverdell Education Savings Accounts UGMA/UTMA custodial accounts These options can help you invest for college, and may provide you with significant tax and estate-planning benefits. For many families, education is one of the largest expenses they will ever incur. The College Board estimates the current cost of attending college for four years to be $99,452 at an in-state public institution and $195,797 at a private institution.* So the decisions you make about investing for education how much money you will need, which investment vehicles you use and what changes to make to your education investment strategy over time have an impact on every part of your financial life. If you are a parent or grandparent, your Merrill Lynch Financial Advisor can help you prepare an integrated investment strategy that coordinates your child s or grandchild s education funding with your other financial goals. In addition to helping you invest for college, tax-advantaged education planning strategies can help minimize your taxes and remove assets from your taxable estate for estate tax purposes. Your Financial Advisor can help you consider these questions: How much money will you need to meet your education and noneducation expenses? What changes will you need to make to your education investment strategy over time? What impact does your education investment plan have on your liquidity or estate planning? How do your available assets affect your choice of investment vehicles, how much you contribute, or your current and future tax obligations? Comparing the available investment vehicles: What is the range of investment options? How do you evaluate funds, fees and performance? How do you compare investment vehicles that may have tax benefits with other planning options? * Source: Estimates based on the College Cost Calculator found at board.com as of December Assumes four years of attendance and an annual average tuition increase of 6%. This calculator is meant to give you a general idea about where you stand financially, based on the amounts provided. These are estimates only and are not intended as investment advice. You should obtain personal advice from qualified professionals. 3

4 The Answer: Three possible strategies to help you optimize your education funding Section 529 Plans These plans are a popular, tax-efficient way for parents, grandparents, friends and family members to invest for a child s higher education. You can use the funds for tuition, fees, room, board*, books, required supplies and equipment. Other acceptable expenses include payments for special needs beneficiaries at any accredited school, including public or private universities, graduate schools, community colleges, and accredited vocational and technical schools. 1 Section 529 plans provide significant tax advantages. Any earnings generated will be federal (and possibly state) income-tax-free as long as the withdrawals are used for qualified higher education expenses. 2 So even small amounts, invested regularly, can significantly contribute to your education funding plan. You can make annual contributions of up to $14,000 ($28,000 for a married couple) without incurring a federal gift tax. Contributions are considered completed gifts and are excluded from your estate for federal estate tax purposes. Under the five-year gift rule, you can make account contributions of $70,000 ($140,000 for a married couple) for each beneficiary in one year, as long as no additional contributions or other gifts are made during the five-year period. 3 This election generally will not result in a gift tax liability for you or reduce your federal unified estate tax credit. This advantage can be attractive if you have multiple children or grandchildren. By making multiple gifts, you can remove significant assets from your taxable estate while helping to pay education costs for your loved ones. What s more, you retain control of the assets, so the assets can be used to benefit other family members if the current beneficiary does not use them. 4 And the funds in a Section 529 plan account can be withdrawn at any time, subject to federal (and possibly state) * The beneficiary must be attending an accredited institution as least half time for room and board to be considered an eligible expense. income taxes and a 10% additional tax on the earnings under certain circumstances. These accounts have no age limit on contributions or withdrawals, and there are no income limits for contributions. They also generally are treated more favorably for federal financial aid purposes than other savings vehicles. 5 Most Section 529 plans offer a wide range of investment choices, including age-based investment options, which automatically shift from more aggressive equity funds to more conservative fixed-income funds and cash as the beneficiary nears college age. Merrill Lynch offers: A variety of tax-advantaged Section 529 college investing plans that can help you invest for your child s or grandchild s qualified higher education expenses, as well as help you remove assets from your taxable estate for estate tax purposes. Before you invest in a Section 529 plan, request the plan s official statement from your Merrill Lynch Financial Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary s home state offers any state tax or other benefits that are available only for investments in such state s 529 plan. Section 529 plans are not guaranteed by any state or federal agency. 4

5 Coverdell Education Savings Account (ESA) This account allows federal (and possibly state) tax-free withdrawals for qualified education expenses, including elementary and secondary school (kindergarten through 12th grade), as well as for higher education expenses.6 Earnings on non-qualified withdrawals are subject to federal income tax and may be subject to a 10% additional tax, as well as state and local income taxes. For 2013, you can contribute to an account only if your modified adjusted gross income is less than $110,000 for individuals or $220,000 for couples filing joint tax returns. A Coverdell ESA owner has unrestricted investment options unless restrictions are imposed by the institution where the account is held. And, like a Section 529 plan account owner, an ESA owner retains control of the account and can change beneficiaries at any time. 4 An ESA account can be funded with contributions of up to $2,000 a year until the beneficiary s 18th birthday.7 You can contribute after age 18, however, for children with special needs. Like Section 529 plan accounts, Coverdell ESAs are treated more favorably for federal financial aid purposes than UGMA/UTMA accounts.5 Merrill Lynch offers: Experience to help you evaluate the potential benefits and limitations of a Coverdell ESA compared with a Section 529 plan account, UGMA/UTMA account and other investment vehicles. Helpful guidance to help you integrate your education funding plans into your overall financial strategy. 5

6 UGMA/UTMA Custodial Account These taxable accounts have no restrictions other than those imposed by the relevant state UGMA/UTMA laws. They can be funded with securities or cash, which make them one of several ways to diversify concentrated stock positions. However, they may be considered part of the custodian s estate until the minor reaches the statutory vesting age. UGMA/UTMA account assets can be used for any purpose, as long as they benefit the minor for whose benefit they are held. UGMA/UTMA assets are irrevocable, and the beneficiary may not be changed. The account beneficiary also gains control of the assets at the statutory vesting age, at which point the custodian no longer controls how the funds may be used. Because UGMA/UTMA accounts offer limited tax savings and control, Section 529 plans and Coverdell ESAs generally are better options when investing for higher education costs. However, UGMA/UTMA accounts still may be appropriate if you are saving for private elementary or secondary school costs or for expenses such as a car, a home down payment or a wedding. Merrill Lynch offers: Experience in evaluating the advantages and disadvantages of UGMA/UTMA accounts compared with other savings vehicles for each individual financial situation. Strategic analysis of how UGMA/UTMA accounts can be integrated into the rest of your financial strategy. UGMA/UTMA accounts also qualify for the 2013 federal annual gift-tax exclusion of $14,000 for individuals or $28,000 for couples. In 2013, the first $1,000 of a child s income generally is tax-exempt, the next $1,000 of unearned income generally is taxed at the child s tax rate, and unearned income over $2,000 generally is taxed at the parent s tax rate if the child is under age 19 (or is a full-time student under age 24) at the end of the year. Call Merrill Lynch Contact your Merrill Lynch Financial Advisor for a free Education Snapshot that will generate an analysis and assist with preparing a strategy to help fund your education planning goals. 6

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8 Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. You should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with your personal professional advisors. 1 Institutions must be eligible to participate in federal student financial aid programs. Many foreign institutions are also eligible. 2 To be eligible for the favorable tax treatment afforded to any earnings portion of withdrawals from Section 529 accounts, such withdrawals must be for qualified higher education expenses, as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. 3 Contributions during 2013 between $14,000 and $70,000 ($28,000 and $140,000 for married couples filing jointly) made in one year can be prorated over a five-year period without subjecting you to gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $70,000 ($140,000 for married couples filing jointly) maximum, additional contributions can be made without you being subject to federal gift tax, up to a prorated level of $14,000 ($28,000 for married couples filing jointly) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $14,000 and $70,000 ($28,000 and $140,000 for married couples filing jointly) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in his or her estate for estate tax purposes. 4 Some restrictions apply. Please refer to the Internal Revenue Code definition of member of the family. 5 This is based on the current interpretation of federal financial aid rules. Financial aid rules may change, and the rules in effect at the time the beneficiary applies may be different. For more complete information, please go to the Department of Education s Web site at 6 To be eligible for the favorable tax treatment afforded to any earnings portion of withdrawals from Coverdell ESAs, such withdrawals must be for qualified higher education expenses or qualified elementary and secondary education expenses, as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. 7 Your contribution limit may be reduced if your modified adjusted gross income is between $95,000 and $110,000 for individuals or between $190,000 and $220,000 for couples filing a joint tax return Bank of America Corporation. All rights reserved. AR3840A RC-0113