If You’ve Got the Money . . .

Assuming a family has enough income to set some aside for a child’s college expenses, how should the money be held? Here are the main options:

Parents’ name: The simplest approach is for parents to save in their own name. This gives them complete control of the money and enables them to use it for other things if circumstances change.

Hanging on to the savings, though, means that interest, dividends and other gains are taxed at the parents’ rate.

Child’s name: Putting money in the child’s name is also easy, but in the long run the parent has less control.

In addition, rules for federal student aid require that a student make available 35% of his or her assets for tuition each year. Over four years, about 85% of the student’s money would be eaten up. Parents, on the other hand, are expected to contribute a much lesser portion. Thus, a child with a lot of money in his or her own name might get less student aid.

Custodial accounts: State laws permit parents to open bank, brokerage or mutual fund accounts in the child’s name and name a custodian to oversee the funds. Each parent can give as much as $10,000 to each child every year without incurring gift taxes, thus allowing a couple to shift $20,000 annually to each child-more than enough to cover most family transfers.

Such accounts are easy to set up without a lawyer or accountant, and there are no drafting or other costs associated with them.

However, the money still becomes the child’s outright at age 18 or 21, depending on the account’s legal status. The parent cannot take it back.

In the meantime, some earnings in a custodial account are taxed at the parents’ rate. But unrealized capital gains--common with stocks--incur no taxes.

Trusts: There are several kinds of trusts a lawyer can set up with various tax and access advantages and disadvantages.

A 2503(c) minor’s trust allows a gift to qualify for the $10,000 annual gift-tax exclusion while not being accessible to the child until he or she is 21.

A 2503(b) trust allows you to keep the assets locked up until the child is well into adulthood and still qualifies most of your gift for the tax exclusion, although it requires that income be paid out each year.

A Crummey trust, named after a court case, provides a way of qualifying your gift for the tax exclusion, but requires that the child voluntarily waive his or her right to each year’s gift.