Starting a Coverdell Account

Almost any bank, mutual fund company or stockbroker will be happy to help you establish a Coverdell account. (We’ll refer to the financial institution you choose as the account provider.) Be sure to ask about their minimum balance and what fees, if any, will apply to the account. You’ll need to supply the following information:

• Your own name and social security number.
• The designated beneficiary’s name, address, date of birth and social security number.
• The name, address and social security number of the responsible individual. This is the person who will control the account, at least initially. If you’re a parent or guardian of the designated beneficiary, you can name yourself as responsible individual. Otherwise you have to name a parent or guardian.

You’ll also need to tell the account provider the amount of your initial contribution. In some cases you may have to select an investment at the time you set up the account. In others (such as an account with a stockbroker) you may simply deposit the money into the new Coverdell account and the responsible person can invest it later.

Choices on the Account Agreement Form

If your account provider uses the standard form published by the IRS for the account agreement, you will have two choices when you set up the account. The first has to do with what happens when the designated beneficiary reaches the age of majority (usually 18) under the relevant state law. Unless you indicate otherwise in the agreement, control of the account will pass to the designated beneficiary at that point.

If you want to retain control of the Coverdell account after the beneficiary turns 18, you must check a box on the IRS form at the time you establish the account.

The other choice has to do with changing the designated beneficiary. When you set up the account, you declare whether or not you want the responsible individual (the person in control of the account) to be able to change the designated beneficiary. If you’re going to be the responsible individual, you probably want to reserve this flexibility in case of a change in circumstances. You might want to prevent a change in beneficiary in some situations, though.

You’re allowed to include additional provisions concerning the account when you set it up, so long as they are consistent with the rules for Coverdell accounts and with state law. You might, for example, name a person who will receive the account in the event the designated beneficiary dies. Doing so may permit the account to continue as a Coverdell account instead of terminating at the death of the designated beneficiary.