cbak.com 14 In Touch Coverdell ESAs Come with Different Roles BY ALAYNA DROPE, CIP, CHSP What are the different roles commonly seen on a Coverdell ESA application? While they may vary somewhat from one forms vendor to another, the following terms and definitions describe the different roles with Coverdell education savings accounts (ESAs). Grantor/Depositor: The grantor or depositor is the person who establishes the ESA with the approved financial organization for the benefit of the designated beneficiary and is usually the first contributor. (Be aware that persons other than the one who establishes the ESA may also contribute for the same designated beneficiary.) Designated Beneficiary: The designated beneficiary is the individual on whose behalf the ESA is initiated. The grantor/ depositor identifies the designated beneficiary on the plan agreement or application upon establishing the account. An ESA may be set up with contributions for a designated beneficiary who has not turned age 18. A new ESA may be established through a transfer or rollover for a designated beneficiary under age 30. Responsible Individual: When the ESA is opened, the grantor/depositor names the responsible individual on the plan agreement. The accountable individual generally is the designated beneficiary’s parent or guardian. Document permitting, the responsible individual may be someone other than a parent or guardian. Only one responsible individual may be named on the plan agreement at a time; on some vendors’ documents, a successor responsible individual may be identified. Death Beneficiary: In the event of the designated beneficiary’s death, one or more primary or contingent death beneficiaries may be named to receive the ESA assets. While the IRS model ESA forms do not facilitate the naming of death beneficiaries, most financial organizations use ESA applications or beneficiary designation forms to name death beneficiaries. When can the designated beneficiary of an ESA be changed? You must check the plan agreement. The grantor/depositor could elect to allow the responsible individual to change the designated beneficiary to a qualified family member of the designated beneficiary under age 30 at any point in time. Eligible family members include the designated beneficiary’s spouse, child, grandchild, sibling, parent, niece or nephew, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law, and the spouse of any such individual. A designated Alayna Drope, CIP, CHSP beneficiary’s first cousin (but not a cousin of his or her spouse) is also a qualified family member. When can the responsible individual of an ESA be changed? There are two triggering events that allow the responsible individual to be changed from the named individual on the plan agreement: the responsible individual’s death and if the plan agreement names or defaults to the designated beneficiary as the responsible individual upon the designated beneficiary reaching the age of majority. If the original, responsible individual dies or becomes incapacitated while the designated beneficiary is still a minor, the successor responsible individual becomes the responsible individual. The successor responsible individual is a person named by either the grantor/depositor when the ESA is established or by the responsible individual at a later time. The successor responsible individual generally is the other parent or guardian unless the document permits the responsible individual to be someone other than a parent or guardian. If a successor is not named, the other parent or a successor guardian will be called the responsible individual. The grantor/depositor can indicate on the plan agreement that the parent or guardian (or other named person) will continue as the responsible individual, even after the designated beneficiary reaches the age of majority under state law. This person will continue as the responsible individual until all assets are distributed from the ESA or — upon the designated beneficiary reaching age 30 — the account ceases to be an ESA. If not elected otherwise by checking an option in the plan agreement, the designated beneficiary of the ESA becomes the responsible individual when she attains the age of majority (as determined under state law). But if the responsible individual dies or is incapacitated after the designated beneficiary reaches the age of majority, the designated beneficiary will become the responsible individual.