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 states
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 states 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
- 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