Dear Liz: After the pandemic started, we received money from the federal government and decided to put it in a custodial account for our son, starting when he was 14 years old. We invested the money in a Standard & Poor's index fund. I now think I made a mistake and should have simply added the money to the 529 college savings plan we have for him. Can I close the custodial account and transfer the money to the 529 number? If so, what is the process? Another benefit I see of doing this is that the money may not be taken into account in financial aid calculations. He will not qualify for need-based aid because we are financially well off but he may qualify for merit-based aid.
Answer: You can transfer money from a custodial account, but contributions to a 529 college savings plan must be in cash. This means you'll have to sell the index fund, which will likely mean paying a tax bill on the gains.
If your primary concern is financial assistance and your family won't qualify for need-based assistance, there may be a good reason to shoulder that tax bill right now. The merit aid you hope to receive will not be affected by where you save. Merit aid is not based on your financial situation but is instead an incentive to attend school and reflects how much the college wants your child.
In contrast, need-based aid can be deeply affected by probate accounts, which are considered a student's assets. Since 529 plans are viewed more favorably through needs-based formulas, a transfer may make more sense. If there are too many gains in a custodial account, though, parents would be smart to get tax advice before making this step.
As college expenses loom, consider picking up a copy of The Price You Pay for College: A Brand-New Roadmap for the Biggest Financial Decision Your Family Will Ever Make, by Ron Lieber, personal finance columnist for The New York Times. The book provides a comprehensive yet readable guide to a fraught and expensive process.
Naming beneficiaries becomes difficult
Dear Liz: I have spent most of the past three decades abroad. Relationships fade if there is little contact. Thus is life. Most of the financial accounts I have allow me to introduce an organization as a beneficiary. But some organizations, like TreasuryDirect, require an actual person to be listed as a beneficiary. I've reached out to some of my acquaintances to ask if they'd like to be the beneficiaries of my services, but as soon as I say I need their Social Security numbers, they think I'm trying to scam them. My curious question is: to whom can I leave my money?
Answer: If you do not name a beneficiary of your U.S. Savings Bonds, they become part of your estate when you die.
The proceeds can be distributed according to your will or living trust. This may require a court procedure known as probate, but whether this is a big deal depends on where you live and the size of your will. Many states have simplified probate which can make for a (relatively) short process for small estates.
If your savings bond holdings are not large and your other accounts have beneficiaries – which usually means they are avoiding probate – this may be a reasonable approach.
Another option is to create a living trust and reissue the bonds to the trust, said Burton Mitchell, a Los Angeles estate planning attorney. Living trusts have some setup costs, but they avoid probate and are flexible.
“The reader can then modify the living trust whenever they wish without reclaiming ownership of the financial accounts,” Mitchell said.
Unwanted fees for online payments
Dear Liz: You recently answered a question about online bill pay fees. I agree that the $12 fee mentioned is too high but I also know that maintaining any platform costs money. I work for a non-profit organization that receives donations and our donors can choose to pay a fee. I doubt regular customers would agree to pay the company's fees by choice.
Answer: The key word here is “choice.” Your donors volunteer to give a little extra to help a charity. The letter writer was facing a $12 fee to pay the insurance bill securely online, when the alternative is to send a check through the (unsecure) mail. Most companies have realized that online payment is better for everyone involved and are trying to encourage its use, rather than charging consumers with unwanted fees for using this option.
Liz Weston, certified financial planner, is a columnist for the Los Angeles Times and the personal finance site NerdWallet. Questions can be sent to her at 3940 Laurel Canyon, No. Box 238, Studio City, CA 91604, or by using the “Contact” form at Asklizweston.com.
