by Danielle A. Merrick¹

Section 529 of the Internal Revenue Code (hereinafter "the Code") was created under a provision contained in the Small Business Job Protection Act of 1996.² Section 529 is a federal mandate that allows states to implement qualified tuition programs that would then receive federal tax-exempt status. Initially, the section was greeted with little fanfare and even less interest, but as the possibilities for financial gain were realized, the capitalist market quickly embraced the plans and began marketing them fanatically. Qualified tuition programs are now expected to have invested assets of nearly $200 billion by 2007.³

The juxtaposition of a federal mandate with state implementation has created interesting problems. The lack of cohesion between the different states' plans has created confusion, along with issues regarding choice of law for bankruptcy and escheatment. In addition, the different states' tax treatment of withdrawals from the plans has created a need for additional disclosure by the states when marketing their plans.

When the Section 529 provision was proposed and enacted, Congress established that the purpose of the qualified tuition programs was to "encourage persons to save to meet post-secondary educational expenses."⁴ Most of the states that have implemented qualified tuition programs have interpreted Section 529 of the Code very liberally and have not adhered to the original intent of the legislature. The resulting states' plans are designed primarily with wealthy investors in mind. These investors are using the plans not only to fund their children's and grandchildren's educations, but also to remove money from their existing estates to avoid estate taxes. The states' high contribution limits aid in wealthy individuals' ability to remove money from their estates. The result has been that virtually every state's plan is unique, and that very few of these plans seem to ultimately serve the original intent of Congress.

I. Background and Legal Doctrine

Individuals who want to save for post-secondary education have a few specifically tailored options available to them. First, the Uniform Gift to Minors Act\Uniform Transfer to Minors Act⁵ account provides an account for the minor with an adult as a custodian. The custodian controls this account until the child reaches the age of majority in his or her state. However, this account is not tax-exempt and children under the age of 14 may be subjected to the "kiddie tax,"⁶ which is a tax that is levied at the parents' rate on a portion of the unearned income of the minor. Another disadvantage to this account is that the money must be released to the minor once he or she reaches the age established under the governing act. An advantage to this account is that the custodian can choose the investment and can also use the money for expenses for the minor other than education.

Second, the Coverdell accounts are education savings accounts⁷ for individuals under the age of 30 to be used only for education. The money invested in these accounts grows tax-deferred. One downside to these accounts is that the maximum contribution amount is $2,000 per calendar year.⁸ This is not a large sum of money to invest for college education. Another disadvantage is that there are income limitations defining who can contribute to these accounts. One advantage these accounts have, other than the fact that they grow tax-free, is that since the account can only be used without penalty for education, there is less risk that the minor would use the account for other purposes.

Third, qualified tuition program accounts are accounts managed by individual schools or states.⁹ There are two varieties to these plans. First, there are pre-paid tuition plans.¹⁰ These plans essentially allow the investor to put money away at the current day tuition prices and the state covers the difference when the minor goes to school. This allows the investor to pay tuition at the current day price, but these plans are usually tied to attending a public school within the state, since the current day tuition prices are based on tuition at the state's schools. Second, there are college savings plans.¹¹ These are more popular than the pre-paid plans because they can generally be used at any school and not just the state's schools. In addition, there are usually more choices in investments. The monies can be transferred from one state plan to another and from one beneficiary to another. The alluring component of these plans is that a parent, grandparent, friend, etc. can save for a minor's education, but never forfeit control of the account. The donor does not have to release the funds to the beneficiary and can simply transfer them to another beneficiary if the original beneficiary does not attend college. This flexibility is driving the rapid proliferation of these savings vessels.

Section 529 allows qualified tuition programs to be established and maintained by the state or educational institutions; these programs are exempt from federal taxation.¹² All purchases into the programs must be made in cash,¹³ which means that monies held in mutual funds or other securities must be liquidated before being contributed to a qualified tuition program. Section 529 also requires that each beneficiary have a separate accounting, that the donor cannot control the investment direction, that the donor cannot pledge the interest in the program as a security, and that there are safeguards to prevent contributions in excess of what the beneficiary needs for education.¹⁴ Many states' interpretation of Section 529 varies as to what constitutes controlling investment direction and the amount needed to finance an education, resulting in variances in the specifics of the individual states' qualified tuition programs.

Section 529 provides an interesting gift tax loophole, and is discussed in further detail later in this article. Donors can contribute five years' worth of tax-free gifts up to the aggregated annual exclusion amount, which is an amount that a donor can gift to donees free from gift tax annually. This amount is currently $11,000. These are considered completed gifts to the beneficiary in year one, and the excess amount is aggregated over the remaining four years.¹⁵ This allows donors to front load their beneficiaries' accounts for maximum return. For example, a donor could contribute $55,000 in year one to a donee, using up five years of annual exclusions and not paying any gift tax. Therefore, the account to which the $55,000 was contributed could compound interest on the full $55,000 from day one, instead of compounding on $11,000 in the first year, $22,000 in the second year and so on.

Another aspect of Section 529 that is as intriguing as the gift tax loophole is the estate tax treatment. None of the interest in a qualified tuition program is included in the gross estate of the donor.¹⁶ This has served as a large selling point in the marketing of qualified tuition programs to estate planning consumers.

The qualified tuition program accounts can be moved between states and beneficiaries without tax consequences to the donor.¹⁷ Many donors have used this benefit to maximize state tax deductions and minimize penalties by keeping an account in a state long enough to take the state tax deductions, but then moving it to another state that does not have penalties on withdrawals before removing any money from the account.

The broad generalities of Section 529 have resulted in very different interpretations of the requirements of the section at the state level. A comparison of six different states' qualified tuition programs will illustrate how varied the results can be regarding the interpretation of the amount needed for education and the resulting contribution limits.

Illinois' plan, which is managed by Solomon Smith Barney, allows contributions up to $235,000, and has unlimited income tax deductions for state income tax on contributions made to the state plan.¹⁸ The unlimited state income tax deductions can serve as a large draw for any donor that either lives or pays taxes in the state, but most other states limit the amount of state income tax deductions that can be taken for contributions to a qualified tuition program.

Louisiana's plan, managed by the state treasurer, for example, has a state income tax deduction of $2,400, and a contribution limit of $182,440.¹⁹ This plan allows $52,560 less in contributions than Illinois.

The contribution limit of Illinois seems to be the norm. Kansas'²⁰ plan, managed by American Century Investment Management, Inc., Mississippi's²¹ plan, managed by TIAA-CREF, and Oklahoma's²² plan, managed by TIAA-CREF, all have contribution limits of $235,000. These states' income tax deductions vary greatly at $2,000, or $4,000 for filing jointly,²³ $10,000 or $20,000 filing jointly,²⁴ and $2,500 respectively.²⁵

North Carolina's²⁶ plan, managed by Seligman, has one of the highest contribution limits in the country, with $276,046 and no state income tax deductions; compare this to Louisiana, which has one of the lowest contribution limits in the country with a state income tax deduction of $2,400.²⁷ There does not appear to be any logical reason that the highest and lowest contribution limits in the country are $93,560 apart. However, both plans conform to the requirements of Section 529.

Likewise, the fact that some states offer unlimited state income tax deductions, while some states offer no state income tax deductions at all, does not preclude any of those states' plans from falling within the requirements of Section 529. The broad sweeping language of Section 529 has created a confusing marketplace of qualified tuition plans with completely different provisions.

II. Escheatment and Bankruptcy

Section 529 does not allow interests in the qualified tuition program to be used as security for a loan,²⁸ but also does not specifically offer protection from creditors. This lack of protection has been addressed by some states. Alaska, Colorado, Kentucky, Louisiana, Maine, Nebraska, Ohio, Pennsylvania, Tennessee, Virginia and Wisconsin all have restrictions protecting qualified tuition program assets from creditors' claims, attachment or garnishment.²⁹ However, in the absence of such a statutory provision, Nevada's attorney general has already confirmed that creditors may reach qualified tuition program assets,³⁰ on the basis that the beneficiary does not possess a vested property interest in the qualified tuition program until an irrevocable delivery of the assets to the beneficiary has occurred; therefore, the account owner of the qualified tuition program could still have the assets attached as a matter of law.³¹ No other states have issued opinions similar to Nevada's opinion at this time.

There is a policy argument that all assets in qualified tuition programs should be protected by statute at the state level. The Employee Retirement Income Security Act of 1974 mandates that assets in employer-sponsored plans must be protected from creditors;³² this includes such assets as employee retirement plans. Individual Retirement Accounts are protected at the state level, in many states, on the basis that they are individual assets and not employer-sponsored plans.³³ Qualified tuition programs seem to align most closely with Individual Retirement Accounts.³⁴ Assets in a qualified tuition program grow tax-deferred in the same manner as individual retirement plan assets, which lends credence to the theory that qualified tuition program assets are similar in form and purpose to individual retirement plan assets. The purpose of the funds in a qualified tuition program is to pay for education, which is not a frivolous use. The states appear to have conceded that retirement assets are essential to a working capital economy and have taken steps to adequately protect those assets. The same argument can be made for qualified tuition programs. Students who have the ability to pay for more of their education costs outright will not have to rely on as many loans or grants. The states should have an interest in protecting qualified tuition program assets, even if that interest is merely economic. There would need to be a statute that would also protect these assets but would also include some sort of limitation precluding donors from dumping large amounts of assets into these programs with the purpose of avoiding creditors. Some states have already addressed this issue, but more states need to ensure that they have adequate language in their statutes to protect these assets.

State law usually controls creditors' rights.³⁵ It is not clear which states' laws will apply when there is a conflict of laws.³⁶ For example, if a donor who is domiciled in Missouri establishes a qualified tuition program in Kansas for an Illinois-domiciled beneficiary and that donor falls into a debt situation, it is unclear if Missouri, Kansas or Illinois laws apply. It can be argued that Missouri's laws should apply since the donor is domiciled in Missouri.³⁷ The same argument can be made for Kansas' laws since the account is managed by the state, a contract between the donor and the sponsoring state was entered into within the state, and the assets are held in the state.³⁸ Finally, there could be some argument that Illinois' laws should apply, since the assets are essentially in trust for the beneficiary who is domiciled in Illinois.³⁹ Depending on the different states' courts, there could be a difficult decision as to which law to apply. This situation has not played itself out yet. When this situation presents itself, it will be left to the courts' discretion to decide which states' laws apply, since no decision has been made yet regarding qualified tuition program assets.⁴⁰

Bankruptcy claims involving qualified tuition programs have been addressed at the federal level. "Section 225 of the Bankruptcy Reform Act of 2001 passed by the Senate on March 15, 2001…provides that 529 Plan accounts of an owner who files bankruptcy will not be included in the bankrupt estate if the funds were contributed to the 529 Plan for the benefit of a child or grandchild not less than 720 days prior to the filing for bankruptcy."⁴¹ The two-year limit is to help prevent individuals who know that they will be filing for bankruptcy from dumping money into a qualified tuition program to protect it from claims. This act will protect some qualified tuition program assets from being affected by bankruptcy filings.

All aspects of creditor rights to qualified tuition programs could be addressed on the federal level. Amending Section 529 to protect qualified tuition program assets from all creditors and attachments would offer the most unified and comprehensive solution. By leaving most creditors' rights situations to the discretion of courts in the individual states, the possibility of a myriad of confusing results is increased. An amendment to Section 529 or, in the alternative, to the individual state statutes, that simply protects these assets from creditors, following a proscribed number of days after contribution to the qualified tuition program, is a reasonable way to ensure uniform treatment of these assets in state courts.

III. Benefits to the Wealthy

The second largest beneficiary of the Section 529 qualified tuition programs has been extremely wealthy individuals. The programs have allowed many wealthy individuals to insulate portions of their estate from estate taxes, yet still retain control over their assets.⁴² Contributions into qualified tuition programs are considered present interest completed gifts, even though the individual retains the power to revoke the contribution of the assets.⁴³ The donor can give $11,000 to each beneficiary every year or may elect to spread $55,000 over five years for gift tax annual exclusion purposes, yet put all of the money into the account in the first year.⁴⁴ If the donor chooses to make contributions over the annual gift exclusion amount, the donor could contribute the entire contribution limit to the qualified tuition program upon opening the account. This account would receive the benefit of compounding interest on a larger sum of money upfront. This creates an inherently inequitable situation in favor of wealthy investors who can afford to fully fund their beneficiaries' qualified tuition program upfront and can also afford to pay any gift taxes assessed on the contribution. If the qualified tuition programs were established with the intent to help all individuals save for post-secondary education, individuals who were able to fund their educations without the assistance of the programs are the most benefited population, because they get gift tax and estate tax breaks for fully funding the tuition saving accounts. The individuals who most need the qualified tuition programs are not able to take full advantage of the tax and interest accumulation benefits provided by the programs. All individuals are not given the same opportunity to save for post-secondary education.

Changes in beneficiaries are not considered taxable gifts and are not subject to generation skipping transfer tax unless the new beneficiary is two generations below the prior beneficiary or is not a member of the prior beneficiary's family;⁴⁵ even then, any generation skipping transfer tax is paid by the original beneficiary and not the donor, even if the donor directed that the beneficiary be changed.⁴⁶ An example of how the generation skipping transfer tax treatment can be helpful is illustrated below.

Wealthy donors can use the lack of gift taxation on beneficiary changes to remove even larger sums of money from their estates.⁴⁷ For example, a donor opens accounts for child 1 and cousin 1. The donor puts $55,000 into each account. The donor then changes the beneficiary on the account for cousin 1 to child 1. Child 1 now has 110,000 in his or her account. By changing beneficiaries, the donor was able to put additional money in child 1's account without being subject to gift tax or generation skipping transfer tax. The donor can open accounts with many different beneficiaries and ultimately put contributions up to the annual exclusion amount in each account, then transfer all the proceeds to one beneficiary, up to the contribution limit in the state, without being subject to any gift tax consequences. However, there is always the possibility that the Internal Revenue Service will decide that this transaction was a sham transaction and order taxes to be paid accordingly.

In addition, most states do not have any residency requirements to open a qualified tuition program, which allows individuals to open multiple accounts in multiple states.⁴⁸ As long as a donor does not exceed the annual gift tax exclusion every year, he or she could fund multiple accounts for one beneficiary throughout several states without gift tax consequences. With account contribution limits as high as $305,000,⁴⁹ donors with accounts in just a handful of states having higher contribution limits could save more than a million dollars for one beneficiary's education, provided that the donors were willing to pay gift tax on amounts that exceeded their annual exclusion. While education costs are increasing, they have not reached that level yet. However, if the beneficiary does not use all of the money, the donor can simply transfer the remaining amount to a different beneficiary,⁵⁰ creating financial legacies.⁵¹ This situation allows wealthy individuals to remove even larger sums of money from their estates.

Another advantage to wealthy donors is the ability to take a larger deduction for state income tax purposes. If the donors pay state taxes, some states allow the donors to deduct contributions, up to the state's limit, per beneficiary; or some only allow them to deduct their total contributions, up to the state's limit.⁵² Some states have limits on the contribution amounts that can be deducted from state taxes, some have no limits, and others do not allow any deductions for contributions.⁵³ Donors who pay taxes in states with no limits on deductions, and allow deductions per beneficiary, could put $55,000 into several beneficiaries' accounts and then deduct the entire amounts contributed from their state income tax. While not all wealthy donors will benefit to the same extent, there is a disparity between wealthy donors and non-wealthy donors in terms of the extent of their state income tax deductions.

Qualified tuition programs have become a well-touted estate planning device. Congress did not intend for qualified tuition programs to become an elaborate tax shelter; rather, Congress intended qualified tuition programs to be a method for individuals to save for post-secondary education.⁵⁴ The creation of qualified tuition programs at the state level without strict guidance from the Internal Revenue Service has created several loopholes that allow wealthy individuals to shelter large portions of their estates in these programs. The Internal Revenue Service needs to issue final regulations that will close loopholes that allow the creation of accounts that serve tax avoidance purposes and contribution limits that result in overfunding. The nature of these regulations could include a recharacterization of income that was earned in the accounts determined to have been sheltered from estate, income or gift taxes. Final regulations of this nature would eliminate the overwhelming benefit that wealthy investors receive from qualified tuition programs in their current status.

IV. Investment Types

The options for investing contributions into qualified tuition programs are increasing. There are limits on how varied those options can be. Section 529 indicates that no contributor or beneficiary may, "directly or indirectly direct the investment of any [of the] contributions" into a qualified tuition program.⁵⁵ It appears that some state programs are stretching the four corners of the law.

The age-based portfolios are most in line with the intent of the law. An age-based portfolio essentially provides the donor with a pre-set mix of stocks and bonds based on the beneficiary's age. The younger the beneficiary, the more these portfolios are loaded with risky stocks and bonds.

States also have the option of essentially giving the state treasurer full investment authority over the qualified tuition program assets without any set portfolios. This option clearly does not allow the donor or beneficiary to direct the investment of the funds.

Many other states do not hold so rigidly to the wording of Section 529. Several states have increased their investment options. One way the states have accomplished this is by adding Real Estate Income Trusts (REIT) funds to their portfolio options.⁵⁹ Simply adding REIT funds is a small portion of a larger offering of funds by states. Franklin, AIM, and TIAA-CREF have all added single-fund options to their portfolio choices.⁶⁰ By adding single-fund options, the investment managers of the state's qualified tuition programs have enabled advisors of donors to take an active role in managing assets.⁶¹ Advisors can take an active role in managing assets by assembling a portfolio of stock and bonds customized for a particular donor. Advisors who direct investments into qualified tuition programs, with the instructions of the donors, are creating a situation in which donors are indirectly affecting the investment of contributions into the tuition programs. States that have single-fund investment options seem to be outside the parameters of Section 529 by allowing donors to direct tuition program investments.

The Internal Revenue Service has further compounded this issue. In September of 2001, the Internal Revenue Service began to allow donors to change their investment options without changing beneficiaries once per calendar year.⁶² These notices contradict the wording of Section 529. Section 529 is very clear that investment directions cannot be controlled by the account owner. By contrast, the Internal Revenue Service notices allow the donors to sidestep that by allowing them to change their investment strategies once per calendar year.

The Internal Revenue Service further cemented its position on this policy by issuing a ruling approving the use of individual funds in qualified tuition programs.⁶³ Furthermore, the Internal Revenue Service has indicated that account owners may be able to select from a wide range of investment options and still fall within the wording of Section 529.⁶⁴

The ability to direct the investing of program assets by hiring an advisor creates an inequitable situation that favors wealthier and financially astute investors. The qualified tuition programs should not cater to the economic possibilities of advisor-based plans, but should focus more intently on providing equitable investing opportunities to the public at large.

The Internal Revenue Service needs to define what constitutes directing the investment strategy. There needs to be clarification if changing from one state's plan to another, changing investment strategy within the state's plan, or hiring an advisor to custom build a plan to meet investment needs is considered to be directing the investment strategy. The notices by the Internal Revenue Service have called into question the meaning of Section 529; that meaning now needs to be clarified in final regulations.

V. Taxation

The taxation of withdrawals from qualified tuition programs and income tax deductions for contributions has been a subject of many a debate on aspects of qualified tuition programs. The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) changed many of the ways in which withdrawals were taxed.⁶⁵ The Economic Growth and Tax Relief Reconciliation Act indicated that only non-qualified withdrawals, which were withdrawals for things other than education, would be included in gross income of either the donor or the beneficiary, depending on who initiated the withdrawal.⁶⁶ In addition, EGTRRA removed a source of state revenue by eliminating the requirement that states impose more than a de minimis penalty on any non-qualified withdrawals.⁶⁷ Instead, EGTRRA gave the revenue back to the federal government by enacting a 10 percent penalty for non-qualified withdrawals.⁶⁸ The states were given the option to continue the de minimis penalty,⁶⁹ but to do so would make the states retaining the penalty less competitive with the states that repealed it. EGTRRA eliminated one of the few monetary reimbursements that states received for establishing tuition programs.

Many states have offered deductions on state income taxes for portions or all of contributions into qualified tuition programs as an incentive for residents to invest in the programs.⁷⁰ The Municipal Securities Rulemaking Board has issued guidance to try and protect less tax savvy investors who have invested in programs outside of their state and do not realize the tax benefits they have given up.⁷¹ The board's guidance requires dealers to make known that there can be tax benefits lost by contributing to out-of-state programs.⁷²

However, tax savvy investors can maximize their deductions by changing programs. These investors could contribute the maximum amount that they could deduct into their state's program and then roll the assets over to another state's program after they take the deduction.⁷³ Some states, such as New York⁷⁴ and Virginia,⁷⁵ recapture deductions, but this also can be avoided if the donor merely rolls their Section 529 back into their state's program before they begin making withdrawals.⁷⁶ The way these laws are structured allows donors to get maximum deductions with minimum penalties, all by playing musical chairs with various states' programs.

Illinois has fought this game with the recent passage of legislation, colloquially known as "Oh No You Don't,"⁷⁷ which will include qualified distributions by Illinois taxpayers from other states' programs in gross income of the donor or the beneficiary, depending on who initiated the withdrawal.⁷⁸ In addition, rollovers from other states' programs to Illinois will not be eligible for deduction from Illinois state taxes.⁷⁹

Illinois law is opposed to the vision that the financial industry has been pushing.⁸⁰ The financial industry has envisioned all states allowing deductions for contributions to any state's qualified tuition program, instead of just the taxpayer's state's program.⁸¹ While the financial industry does not favor the Illinois law, their lack of favor does not mean that more states will not adopt similar laws. Some of the states with larger program assets, such as Florida⁸² or New York,⁸³ may want to adopt similar provisions to attract more in-state investors. In addition, because both of those states have large populations, they may want to adopt similar provisions to help recapture more of the deductions they lose via rollovers to other states' programs. Illinois law set the stage for an interesting development on the qualified tuition program front.

The differing tax treatment by various states sets up a stage of confusion and abuse. One solution to this situation — one that the individual states would have to implement — would be to limit contributions to in-state programs. This would solve some of the abuse by individuals who change state programs to direct investments, and also solve the issue of taking maximum deductions, rolling out of the state program, and rolling back in when withdrawals are started to avoid recapture. If donors could only contribute to their in-state program, then even if deductions were different between the states, all donors would be subject only to the tax rules of their individual states and would not be taking advantage of other state's programs to avoid those rules. In addition, there should be some federal guidance on appropriate inclusion in gross income. If Congress wants these withdrawals to be tax-free, they need to provide states some additional guidance to that effect.

VI. Contribution Limits

The contribution limits of qualified tuition programs are established by the states on an individual state level. Proposed regulations to Section 529 indicate that the contribution limits should be based on figures regarding the costs of attending five years of undergraduate education.⁸⁴ The states all have wildly different contribution limits, and even states that are in close geographic proximity to one another can have thousands of dollars' difference between their contribution limits.⁸⁵ The wide variance in contribution limits lends credit to the idea that states may be including graduate level schooling in their calculations or may simply be stretching the guidance of the Internal Revenue Service to create accounts with higher contribution limits.

The Internal Revenue Service appears to be playing into the hands of the states. The IRS has issued a private letter ruling to at least one state confirming that the state may base its contribution limit on four years of undergraduate education and three years of graduate education.⁸⁶ This clearly exceeds the five years of undergraduate education is included in the proposed regulations.⁸⁷ It can be assumed that the state receiving this private letter ruling must have one of the higher contribution limits in the country. This private letter ruling may help explain some of the disparity between contribution limits in neighboring states. States that are following the proposed regulations and are basing their contribution limits on five years of undergraduate education are presumably setting their contribution limits lower than states that have been issued private letter rulings for contribution limits based on four years of undergraduate education and three years of graduate education. These higher contribution limits further benefit wealthy investors who have the ability to invest larger sums of money.

The Internal Revenue Service needs to either issue new regulations that allow for contribution limits based on four years of undergraduate and three years of graduate education, or they need to make their private letter rulings conform to their proposed regulations. Issuing private letter rulings that are not congruent with proposed regulations creates inequitable situations.

VII. Conclusion

The qualified tuition programs that were created by Code Section 529 could be an ingenious way to save for college education. However, the lack of guidance provided by the Internal Revenue Service, coupled with the over-broad provisions of the section, have resulted in state programs that have provisions as varied as their climates. The IRS needs to issue final regulations that will make clear the contribution limits, the provisions needed to ensure that account owners are not directing investments, and the extent to which provisions must be included in plan documents to protect tuition program assets from creditors. In addition, the final regulations should help close up loopholes that allow wealthy account owners to have the largest benefits.

The states and the Internal Revenue Service should work in conjunction to determine what taxes and deductions would be most beneficial to helping contributors save for education. The states and Internal Revenue Service also need to determine if having qualified tuition programs open to out-of-state residents best meets the goal of saving for education. Many of the inconsistencies between states' programs would be mitigated if the states were not competing over assets. There needs to be a partnership between the states and the Internal Revenue Service that results in regulations that best meet the original intent of Congress. The partnership needs to result in regulations that best allow Americans to save for the educational need of future generations.

Endnotes

¹ Mrs. Merrick is a L.L.M. student at the University of Missouri-Kansas City and a licensed attorney in the State of Missouri.

² Small Business Protection Act, Pub. L. No. 104-188, 110 Stat. 1755 (1996).

³ Sandra Block and John Waggoner, 529 College Plan Choices Are All Over The Map, USA Today, July 8, 2002, at B1. See www.usatoday.com/money.

⁴ Staff Of Joint Committee, 104th Cong., General Explanation Of Tax Legislation Enacted In The 104th Congress (Comm. Print 1996).

⁵ Uniform Transfers to Minors Act § 2 (2000), Uniform Gifts to Minors Act § 2 (2000).

⁶ 26 U.S.C.A. § 1(g)(2-3) (2002).

⁷ 26 U.S.C.A. § 530 (West Supp. 2003).

⁸ Id. at (b)(1)(A)(iii).

⁹ 26 U.S.C.A. § 529(a)-(b)(1) (West Supp. 2003).

¹⁰ Id.

¹¹ Id.

¹² Id.

¹³ 26 U.S.C.A. § 529(b)(2) (West Supp. 2003).

¹⁴ 26 U.S.C.A. § 529(b)(3)-(6) (West Supp. 2003).

¹⁵ 26 U.S.C.A. § 529(c)(2) (West Supp. 2003).

¹⁶ 26 U.S.C.A. § 529(c)(4) (West Supp. 2003).

¹⁷ 26 U.S.C.A. § 529(c)(3)(C) (West Supp. 2003).

¹⁸ 15 Ill. Comp. Stat. Ann. 505/16.5 (West Cum. Supp. 2003), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3. Available at www.usatoday.com/money/covers/2002-07-08-529-college-plans.htm.

¹⁹ Iowa Code Ann. § 12D.1 (West Cum. Supp. 2003), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3. Available at www.usatoday.com/money/covers/2002-07-08-529-college-plans.htm.

²⁰ Kan. Stat. Ann. § 75-640 (Cum. Supp. 2002), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

²¹ Miss. Code. Ann. § 37-155-111 (West Cum. Supp. 2003), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

²² Okla. Stat. Ann. tit. 70 § 3970.7 (Cum. Supp. 2003), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

²³ Kan. Stat. Ann. § 75-640 (Cum. Supp. 2002), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

²⁴ Miss. Code. Ann. § 37-155-111 (West Cum. Supp. 2003), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

²⁵ Okla. Stat. tit. 70 § 3970.7 (Cum. Supp. 2003), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

²⁶ N.C. Gen. Stat. § 116-209.25 (2002), www.savingforcollege.com.

²⁷ www.savingforcollege.com, LA Rev. Stat. Ann. § 3095 (West 2003).

²⁸ 26 U.S.C.A. § 529(b)(5) (West Supp. 2003).

²⁹ Jeffrey L Kwall, J.D., Can Creditors Invade Qualified College Savings Plan?, Journal of Financial Planning, March 2001 at 125.

³⁰ Susan T Bart, Planning For College Using Section 529 Savings Accounts, 16 The Practical Tax Lawyer 37 (2002) (citing 1999 Nev. Op. Atty. Gen. 47, 99-10, 1999 Nev. AG Lexis 16 (Mar. 30, 1999)).

³¹ 1999 Nev. Op. Atty. Gen. 47, 99-10, 1999 Nev. AG Lexis 16 (Mar. 30, 1999).

³² 26 U.S.C.A. § 401 (West Supp. 2003), 29 U.S.C. § 1056 (West Supp. 2003).

³³ Investment Company Institute, 1999 Institute State Survey of IRA Protection in Bankruptcy (March 24, 2000). See table available at http://www.ici.org/issues/ret/arc-leg/00_state_bankrupt_surv.html.

³⁴ Id.

³⁵ ALI-ABA Video Law Review: Tax Advantaged Techniques for Financing Higher Education Focusing on Section 529 Plans (American Law Network Satellite Broadcast, Feb. 7, 2002).

³⁶ 68A Am. Jur. 2d Secured Transactions § 8 (2003).

37 Id.

³⁸ Id.

³⁹ Id.

⁴⁰ Id.

⁴¹ ALI-ABA Video Law Review: Tax Advantaged Techniques for Financing Higher Education Focusing on Section 529 Plans (American Law Network Satellite Broadcast, Feb. 7, 2002).

⁴² Janet Novack, The Tuition Estate Trick, Forbes, February 22, 1999, at 142.

⁴³ Chris Plummer, Shades of Green: 529 Plans' Growing Pains; State Rivalries, Abusive Use Threaten College-Savings Tool (May 8, 2002), available at www.CBS.MarketWatch.com.

⁴⁴ 26 U.S.C.A. § 529(c)(2)(B) (West Supp. 2003), Joseph F. Hurley, Brokers and 529 Plans: An Eight-Step Guide: How to Make Educational Savings Plans Work For You and Your Clients, On Wall Street, May, 2002 at 38. Available at www.onwallstreet.com.

⁴⁵ Prop. Treas. Reg. § 1.529-5(b)(3)(ii), 63 Fed. Reg. 45019 (Aug. 24, 1998).

⁴⁶ 26 U.S.C.A. § 529(c)(3)(C)(ii) (West Supp. 2003), Rachel Riede James, 529 Plans: An Education Savings Alternative, 30 The Colorado Lawyer 113 (2001).

⁴⁷ALI-ABA Video Law Review: Tax-Advantaged Techniques for Financing Higher Education, Focusing on Section 529 Plans (American Law Network Satellite Broadcast, Feb. 7, 2002).

⁴⁸ Michelle DeBlasi, A Textbook Plan for College Savings, Bloomberg Wealth Manager, April 2000 at 38.

⁴⁹ Chris Plummer, Shades of Green: 529 Plans' Growing Pains; State Rivalries, Abusive Use Threaten College-Savings Tool (May 8, 2002), at www.CBS.MarketWatch.com.

⁵⁰ Jane Bryant Quinn, Who's Giving Advice on 529's? (March 18, 2002), at www.newsweek.com.

⁵¹ Chris Plummer, Shades of Green: 529 Plans' Growing Pains; State Rivalries, Abusive Use Threaten College-Savings Tool (May 8, 2002), at www.CBS.MarketWatch.com.

⁵² Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

⁵³ Id.

⁵⁴ Staff Of Joint Committee, 104th Cong., General Explanation Of Tax Legislation Enacted In The 104th Congress (Comm. Print 1996).

⁵⁵ 26 U.S.C.A. § 529(b)(4) (West Supp. 2003).

⁵⁶ N.J. Stat. Ann. § 18A:71B-36 (2002).

⁵⁷ Colin Dodds, New Jersey Puts 529 Out to Bid (June 19, 2002), at www.Ignites.com.

⁵⁸ Id.

⁵⁹ Fund Companies Look to REITs for 529s (June 23, 2002), at www.fundaction.com.

⁶⁰ Colin Dodds, Franklin, AIM to Add Single Funds to 529s (May 29, 2002), at www.Ignites.com.

⁶¹ Id.

⁶² I.R.S. Notice 2001-55, I.R.B. 2001-39 (Sept. 24, 2001).

⁶³ Oppenheimer Funds to Enhance 529, Up Fees (July 1, 2002), at www.fundaction.com.

⁶⁴ IRS To Allow Annual Switch In Investment Options for Qualified Tuition Programs, 88 Standard Federal Tax Reports 42 (2001).

⁶⁵ Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16, 115 Stat. 38 (2001).

⁶⁶ Id.

⁶⁷ Id.

⁶⁸ Id.

⁶⁹ Id.

⁷⁰ Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

⁷¹ Alison Sahoo, ICI Calls for More Disclosure on 529 Plans (April 16, 2002), at www.Ignites.com.

⁷² MSRB Changes 529 Rules on Ads and Home State Tax Disclosure (May 27, 2002), at www.fundaction.com.

⁷³ Ira Carnahan, Investing for Kids: What Should You Put in a Tax-Free 529 College Savings Plan? (June 4, 2002), at www.ABCNEWS.go.com/sections/business/dailynews/forbes_020604.html.

⁷⁴ N.Y. Educ. Law § 695-e (McKinney Cum. Supp. 2003).

⁷⁵ Va. Code Ann. § 23-38.81 (2002).

⁷⁶ Ira Carnahan, Investing for Kids (June 4, 2002), at www.ABCNEWS.com.

⁷⁷ Joe Hurley, Wanted: One Beautiful Mind (June 7, 2002), at www.SavingforCollege.com.

⁷⁸ H.B. 4187, 92nd Gen. Assembly (Ill. 2002).

⁷⁹ Id.

⁸⁰ Colin Dodds, Illinois 529 Bill Could Upset Industry's Apple Cart (July 1, 2002), at www.Ignites.com.

⁸¹ Id.

⁸² Fla. Stat. ch. 240.551 (2002), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

⁸³ N.Y. Educ. Law § 695-e (McKinney Cum. Supp. 2003), Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

⁸⁴ Prop. Treas. Reg. § 1.529-2(i)(2), 63 Fed. Reg. 45019 (Aug. 24, 1998).

⁸⁵ Plans for the Picking: Their Performance, Expenses, and Tax Breaks, USA Today, July 8, 2002, at B3.

⁸⁶ Priv. Ltr. Rul. 200134032 (Aug. 27, 2001).

⁸⁷ Prop. Treas. Reg. § 1.529-2(i)(2), 63 Fed. Reg. 45019 (Aug. 24, 1998).