How can I set up a college fund for my possibly terminally ill friend's children?

March 13, 2008 2:11 PM

I have a friend with a possibly terminal illness. I'm trying to figure out a way to set up a college fund, to which any of her friends/family could contribute, for her two young children. So far I've looked into ESAs (might not work due to the $2k annual limit) and 529s, but I've had trouble finding information specific to this type of situation -- which I have to imagine is not all that uncommon. What options should I be investigating? Should I talk to a financial advisor?
posted by mingshan to education (16 comments total)

We pay into an education fund run by the State of California, and that seems to work pretty well, but I would think that if you are planning on investing say more than say $5,000 per year, you should speak with a professional.
posted by Brocktoon at 2:19 PM on March 13

I hope you're friend pulls through, by the way.
posted by Brocktoon at 2:20 PM on March 13

I would think that a 529 plan like Upromise would be exactly what you want. I don't know what sort of information specific to this type of situation you would be looking for.
posted by thomas144 at 2:22 PM on March 13

i'd talk to a financial advisor, just because they can help you sort out all the tax implications, custodianship, etc.

i'm sorry to hear about your friend. she's lucky to have a friend like you.
posted by thinkingwoman at 2:22 PM on March 13

Yeah, you may actually need a lawyer for this. You probably need to set up a charitable trust. I would expect the edu-fund would have many early deposits and then few later. Not what education saving funds were set up for at all.

Good luck to you, your friend, and her family.
posted by d4nj450n at 2:34 PM on March 13

The only complication I can see to doing this with a 529 plan would be that if you set up the account, you will have control over the money, and could actually withdraw it if you wanted to. So basically you would be asking people to trust you not to do that. An alternative might be to set up an Uniform Gift to Minors account, but I would not suggest that as the recipient could do anything they wanted to with the money as soon as they were old enough (and knew about it).

I think it would make more sense for blood relative to set this up for each of the children, if they were so inclined. People could contribute to it if they trusted the blood relative. The complication with you doing this is if you die - I guess the recipient could be the benefactor, but suppose the kid never goes to college - you still control the money and could do anything you want with it (subject to paying taxes on it).

I would never pay a financial advisor for advice about anything (but that's just me). You might have to have a lawyer set up a trust, but from my experience this can be a nightmare, and a terrible waste of money for what you are talking about (I assume, unless you really think you are going to raise what it would cost to send a kid to college today), but could solve the problem of custodianship.

If it were me, and I wanted to do this, I might set up Upromise funds for each kid and then use a Upromise credit card to get 1% rebate on every purchase. I would not ask other people to contribute to the fund you set up, although there is nothing to prevent them from doing this.
posted by thomas144 at 3:14 PM on March 13

Talk to a lawyer. Might want to look into a trust. On preview what d4nj450n says.

I'm not your lawyer and this is not legal advice, just recommending that you obtain competent legal advice in your jurisdiction.
posted by Ironmouth at 3:30 PM on March 13

If your town has a community foundation, talk to them. They often handle things like this.
posted by yclipse at 3:31 PM on March 13

Thanks for the comments and well-wishes so far. I should have made it clear that I wouldn't want to have custodianship over the money. I'd like to do the research and legwork to help set things up, then let my friend and her husband take the final step of signing the paperwork and assuming custodianship of the accounts(s). Then I could let friends/family know about how they could contribute. Does anyone have experience with multiple contributors to 529s? Is it as simple as giving out an address for checks and the account number of the recipient?
posted by mingshan at 3:31 PM on March 13

I know (from having just checked) that anyone can contribute to a 529. I don't know the specifics but I'm sure it's not a big deal. We've been using upromise (actually Vanguard Windsor) because the credit card rebate thing for a few years - it's pretty standard, and nice. I'm pretty sure people can even register with Upromise and have rebates sent to any upromise account when they buy "stuff" (just look at the upromise website), not just accounts over which they have control.
posted by thomas144 at 3:38 PM on March 13

I thing you can also set up a trust fund with a local bank, which would help allay the concern over a friend or family member absconding with the money. The trust officer could then collect the money and invest it in whatever types of accounts or investments that you've agreed on. They should know more about the tax complications too. The children would know about the fund once they hit the age of 14 and have to pay taxes, but it can be set-up that they don't have access until they're 18 or 21. I've been trying to find a link with more info, but all the banks just say "Contact us for more information."
posted by saffry at 3:40 PM on March 13

grrr, s/b I think
posted by saffry at 3:40 PM on March 13

Without research, I'm reasonably sure that only certain relatives can set up a 529 and then get the tax deduction for contributing to a 529. Whether friends can make non-deductible contributions to a 529 that was set up by the proper parties, I don't know.
Really, speak to a lawyer with some experience in the area. A trust doesn't have to be "a nightmare and a terrible waste of money," as someone said above. These publicly available standardized plans weren't intended for this situation.
Best of luck to the family.
posted by JimN2TAW at 3:42 PM on March 13

529 plans (benefits, restrictions) vary from state to state. Some are sponsored by financial institutions, some by the states, and some by colleges. You'll have to do some research to verify the above posts, including mine. Again, best of luck.
posted by JimN2TAW at 3:53 PM on March 13

Unless there's something I don't know (I've always wanted to use that disclaimer :-) ), there's no tax deduction for contributing to a 529, anywhere in the country. The advantage is that the money can grow tax free.
posted by thomas144 at 4:00 PM on March 13

In case anyone references this later: I ended up selecting the Iowa 529 plan, which uses Upromise/Vanguard and has a low minimum contribution ($25). CNN Money rated it highly. I presented my research to my friend with a contribution to get them started. She'll set up the accounts (one for each child) with a family member as the custodian/"participant," and will let me know the account members so I can let friends/family know how to contribute. One minor drawback is that the plan doesn't notify the parents of outside contributions, so donors have to notify the parents separately.
posted by mingshan at 3:29 PM on March 30