Local News

REITs Rebound; Qualified State Tuition Program Helps Parents Plan for College

Posted June 26, 2000

— A reader of my weekly e-mail newsletter wondered why the stock of Raleigh-basedHighwoods Properties(HIW/NYSE) is showing signs of life after months of lethargy. The stock has risen from $23.38 a share in early May to nearly $26 this week. That's not exactly meteoric, but it's not bad for a company in a sector, Real Estate Investment Trusts (REITs), that has been out of favor for a year or more.

Highwoods is not alone. The Morgan Stanley REIT Index, which tracks the sector, is up 14.95 percent this year over last year. I believe there are a couple of factors at work here, and I touched on one of them in this space a few weeks ago.

With investors fleeing the tech sector, they're in search of safer havens. REITs, because of their high dividend yields, traditionally are considered to be such. Highwoods, for example, returns an annual dividend yield of 9.75 percent.

Secondly, Highwoods portfolio of properties is comprised of office buildings in the Southeast. Because it operates in a high-growth corridor, investors are looking more favorably on the company's operations.Last week's column on planning for your children's college prompted a response from a reader who knows about such things. Ed Fulbright, a CPA in Durham, forwarded some thoughts about a planning vehicle known as theQualified State Tuition Program(QSTP), as provided in Section 529 of the Taxpayer Relief Act of 1997. Following are some highlights of the plan, as offered by Fulbright.

    A QSTP has the following advantages:
  1. Tax Advantages
    1. Earnings are tax deferred until distributed.
    2. Earnings are taxed at the beneficiary's tax rate when withdrawn to pay for qualified college education expenses. Most students are in the lowest tax bracket.
    3. Tax free rollover to new beneficiary.
    4. A contribution qualifies for the maximum $10,000 gift tax exclusion.
    5. It qualifies for a special election on the federal gift tax return allowing up to $50,000 per donor in one year. It considers the gift as if it were a contribution given over five years, which is a great way to reduce estate tax.
  2. Availability and Flexibility
    1. No income restrictions regarding who can participate.
    2. Donor still has control and ownership of the account.
    3. Lump sum minimums are $1000 or less for most plans.
    4. Contributions can exceed $100,000.
  3. Investment Options
    1. Different states offer various investment options ranging from conservative fixed income instruments to portfolios customized to the child's age.
    2. Most programs have low-cost professional management.
  4. State Benefits
    1. Many states exempt the earnings on their account from income tax in that state and several offer a deduction for the initial contribution.
    2. Some states also provide other financial benefits, such as scholarships to program participants.
  5. Asset Protection
    1. Some states include spend thrift provisions, which protects assets from creditor claims.
There are four major disadvantages that I find with the QSTP, which are as follow:
  • Earnings are taxed at ordinary income instead of capital gain rates. Since it will be taxed at the beneficiary's tax bracket, this should not be a major factor.
  • Earnings are subject to a penalty if not used for qualified educational expenses. I think it is a reasonable price to pay for the ability to control how the asset is spent.
  • All programs are so new that they do not have a lot of history. This can be offset because most programs use experienced money managers.
  • The account owner has limited control over how and when the money is invested. Most programs did not want to create the administrative burden of a 401k. The use of experienced money managers and age-based portfolios should alleviate this concern.Selecting the right QSTP can be time-consuming. For more information, you may visitwww.savingforcollege.comor read Joseph Hurley's book, "The Best Way To Save For College." Fulbright can be contacted by e-mail atedf@moneyful.comor through his Internet site athttp://www.moneyful.com.

    Have a prosperous week. Dale Gibson is a career journalist and business person who publishes The Gibson Report, a free weekly electronic newsletter on North Carolina business. Questions or comments may be directed to him by e-mail atdale@gibsonreport.comor by phone at 919-834-1033. To sign up for the free report, go tohttp://www.bizramp.com.

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