Chapter 13 - Bait-and-Switch Techniques

Federal tax law offers a significant degree of flexibility to those utilizing QSTPs as a savings vehicle. From a planning perspective, this flexibility is extremely attractive. It means that the donor is not locked into the decisions made when the account is first established. As circumstances change, either planned or unplanned, the donor can usually make the appropriate changes in the way the QSTP account operates.

It is important to point out that the flexibility allowed under federal tax law is not fully incorporated into most QSTPs. The rules for a particular state’s program may significantly limit the maneuverability that the owner of the account would like to have. These limitations should be understood before you contribute to a particular QSTP. This factor will likely influence your choice of program.

Certainly, a large proportion of QSTP accounts will lead a very ordinary life. A parent will set up and fund an account or contract for a son or daughter in their state’s program, and that child will end up using the value of the account to pay for qualified higher education expenses in the future. For some people, that is fine, and even the most inflexible state program (including many of the prepaid tuition plans) could be an appropriate choice.

An increasing number of people, however, will seek to take advantage of the flexibility offered by many of the newer QSTPs, primarily the savings-type plans. A donor will fund (or "bait") an account, and in the future "switch" some aspect of the account. Well-timed switches can save federal and state income taxes, estate taxes and generation-skipping transfer taxes, as well as enhance eligibility for federal financial aid.

The basic moves employed by the "bait-and-switch" technique include the following:

• Switching the designated beneficiary.
• Switching the owner of the account.
• Switching the use of withdrawals from qualified purposes (education expenses) to non-qualified purposes.
• Switching accounts between different state QSTPs.
• Switching funds from an Education IRA or Series EE savings bonds to a QSTP.
• Switching purpose of account from saving for education to saving for retirement (or vice versa).