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URL:  http://boards.fool.com/jimvy-your-strategy-of-keeping-the-funds-in-your-13807701.aspx

Subject:  Re: education investing with AGI over 150K Date:  11/30/2000  9:46 AM
Author:  jkrou Number:  26385 of 75890

Jimvy,

Your strategy of keeping the funds in your name and then gifting them to your child for the needed year of school is a good idea. The pitfalls are taxation at your rate unless you are strictly hoolding non-dividend paying stocks, and the eventual gift issue.

Obviously, you will pay taxes on any dividends as you go along putting away the cash unless you have stocks who will never pay a dividend such as Berkshire A.

In the year that you gift your child you are going to be limited to $10,000 unless you are married in which case the limit of the gift can be $20,000. At the current rate of tuition increases, this may not be enough to cover the cost of tuition so what will be the standby plan? I ask because if you have this much accumulated, then you are pretty much going to be eliminated from the FA game except for some parent type loans and maybe the unsubsidized loan program.

Now, you may be thinking something like this scenario:
If I cash out of the stock position then I will owe gains taxes at my parent rate. Assuming that I now pay them, it will increase the family's estimated contribution since the family income has now increased as well.

On the other hand, if I gift my child with the $10,000 cost basis and then they cash out and pay the taxes at their lower rate what is the net effect? Well, it looks like this--while the federal taxation was lowered due to the income shifting, you have now increased your total family's estimated comtribution significantly because this new income to your child will count at a mere 35% of assets versus the 5.65% of the family's assets.

So, as you can see there is not a clear cut answer of what is best in this situation. While one area is lowered, the other is increased. Only by runnning actual numbers can you determine which is going to play out the best in your case.

good luck,
Jenn

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