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The Ins and Outs of Controlling a Coverdell
ESA
Be sure of exactly who controls a Coverdell ESA; know all of
the ins and outs. No one wants to deal with the headache of an
18 year old discovering their education fund only to run
rampant making unqualified purchases. Of course, this would not
be the behavior of every college student, but it will happen to
someone out there somewhere. Here are some control ins and outs
for your consideration.
With a 529 plan, you can keep in complete control of the
account as the account owner and can even have the value of the
account refunded for your use. This is a little different with
a Coverdell ESA. The responsible person (parent or guardian)
must administer the account for the benefit of the child. Any
money that you take out of the ESA must be for the benefit of
the child. It should not be refunded to the person who
established the account. Coverdell accounts are essentially an
irrevocable gift.
Since the beneficiary of the Coverdell is not of age when you
start contributing to the account, when the account is started
an adult is named the responsible individual. This individual
is typically the parent or guardian of the child. There will be
policies at the financial institution you select to handle your
ESA that determine the supervisory authority for the account.
The responsible individual may be able to retain that authority
for the life of the account. If they wish this individual may
be permitted to transfer the authority to the child at age
18.
With a Coverdell ESA, the responsible individual has more
control to prevent the child from using funds for non-qualified
purposes than UTMA or UGMA accounts. (Uniform Transfers to
Minors Act and Uniform Gifts to Minors Act) If the account is
not completely empty by the time the beneficiary reaches age
30, the balance will be paid to the beneficiary in 30 days. In
case of the death of the beneficiary, the account will be paid
to their estate. This is unless there is an authorization from
a legal representative to change the beneficiary to a surviving
family member or spouse who is under the age of 30.
As the responsible party you have the control to change the
beneficiary to another family member at any time as long as
there was an agreement when the account was started. Then, you
can change the beneficiary to another family member under 30
without having income tax and penalty. This includes anyone in
your immediate family, including stepchildren or stepsiblings
and cousins.
If you are the grandparent who has established this account you
will not be able to change the beneficiary or have the account
refunded for your use. Your choices are to name the parent,
guardian or child as the responsible individual, you will more
than likely not be able to name yourself. You should look to
restrict the powers of the responsible individual if you do not
want the parent or guardian to be able to change the
beneficiary. It is understandable if you want the account to
stay in the name of your named beneficiary no matter what the
circumstance. In this instance, you do not have the same
control of the ESA that a 529 plan would grant you. This may
affect your decision on which account you select.
If you have more questions on your Coverdell ESA, talk with the
providers of the account. This is a great way for parents,
grandparents and children to work together to pay for future
education expenses. The ins and outs of controlling a Coverdell
ESA are important. It’s good to know exactly who’s in control
of your money.
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