Funding higher education costs is a major concern for most families. Until recently, the savings alternatives available consisted primarily of UTMA accounts, trusts, the education IRA and federal education tax credits. Relatively low contribution thresholds, high set-up costs and/or the irrevocability of the option chosen limited the effectiveness of these alternatives.

The past several years have seen the development of a number of state Prepaid Tuition Plans in which various states agreed to pay future tuition costs at prices set at current tuition levels. While contributions to such plans allowed participants to lock-in current tuition rates, the plans were often restricted to the state’s own residents and to enrollment in the state’s own in-state institutions. The donors also lost control over the assets and the states were reluctant to disclose investment allocations or investment performance.

Now, there is a new savings technique called the Delaware College Investment Plan. It combines the advantages of the earlier savings options with continued donor control over the assets saved and a great deal of flexibility. This plan is one of the Qualified State Tuition Programs, also known as §529 Plans, which were added to the Internal Revenue Code by the Small Business Protection Act of 1996. A summary of features follows:

High Contribution Limits

Up to $116,120 can be contributed for each beneficiary to pay for future education costs.

Lengthy Tax-Deferral

Earnings on contributed amounts grow completely free of Federal and Delaware State taxes until they are withdrawn from the plan to pay for higher education expenses.

Substantial Tax Savings

Amounts withdrawn to pay expenses are taxed to the student beneficiary, and not the owner of the Plan. Since many younger stu-dents will often be in a 0% or 15% tax bracket, this aspect yields additional tax savings if the owner is in a higher tax bracket than the student beneficiary.

Full Ownership Of Contributions Without The Estate Tax Consequences

The contributor, and not the beneficiary, of the Plan retain full ownership of his or her contributions, yet the amounts are considered removed from the contributor’s estate for estate tax purposes. Should the beneficiary of the plan assets decide to forego higher education, the donor may remove the contributions and will pay income tax plus a 10% penalty on earnings.

Special Gift Tax Feature

Each person is allowed to make one $10,000 gift per year to each donee free of gift tax. Rather than making five $10,000 contributions over the next five years, this plan allows an immediate contribution of $50,000 this year – so, $50,000 can begin earning tax-deferred income now. Since the $10,000 annual exclusion for each of the next five years will be applied, there will be no gift tax liability incurred.


A Plan can be established for a child, grandchild, spouse, another relative, and even a person unrelated to you. Plan funds can later be transferred or "rolled over" to siblings and other family members to help pay for their education expenses as well.

Full Coverage

There are no age limits or state residency requirements for participants in the Plan. Plan funds can be used nationwide to pay for in state and for out-of-state schools.

Professional Investment Management

Plan funds are managed by Fidelity Investments and are allocated between stock and bond mutual funds depending on the age of the beneficiary. Plan funds are invested in growth equities for younger beneficiaries, and gradually phase over into bonds and money market investments as the beneficiary approaches college age.

Low Minimum Startup

A Plan can be started with systematic monthly contributions of as little as $50 a month or with one single $500 contribution.

Low Fees And Expenses

The annual maintenance fee of $30 is waived if you elect a systematic monthly contribution plan or have a minimum balance of $25,000 per beneficiary. There is a low 0.3% of assets daily charge above and beyond the normal expenses of the mutual funds.

We recommend consideration of the Delaware College Investment Plan for anyone who wishes to set aside money for the future higher education of another, wants to maintain control over the assets, and simultaneously could benefit from the reduction of their estate.

If you would like more information on this or any other gift and estate planning techniques, please consult your financial advisor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.