Alaska has joined more than 32 other states which have enacted qualified state tuition programs. Alaska's plan is available to residents and nonresidents alike, and adds special asset protection features, discussed below.

Qualified state tuition programs are authorized by I.R.C. §529. A participant will contribute cash to the plan for the benefit of a member of the participant's family. For purposes of the annual exclusion (presently $10,000), a participant may elect to take the contribution into account ratably over a five-year period. Therefore, a participant may make a current $50,000 contribution, and in effect use in advance the participant's next four years of annual exclusion amounts. Many programs have a maximum contribution limit which appears to be keyed to an approximation of tuition and expenses for an undergraduate education.

The participant's contributions to the program are free of Federal Gift Tax and Generation-Skipping Transfer Tax. Further, if the participant lives for five years, none of the contributed assets will be included in the participant's gross estate for Federal Estate Tax purposes. During the time that the funds are in the contributed account, they grow income tax-free. At the appropriate time, amounts from the account will be distributed to the beneficiary for tuition and education expenses. The income portion of these distributions is taxed to the beneficiary pursuant to I.R.C. §72(b). Proposed federal legislation would eliminate this income taxation entirely.

The participant may change the beneficiary to another family member at any time, without penalty. The participant does retain the ability to withdraw the funds placed in the account, but the earnings portion of the withdrawn funds will be taxed at the participant's tax rates and will be subject to a penalty of at least 10% of the earnings. Most plans allow the beneficiaries to attend any educational institution. Contributions to a plan must be in cash. Most states contract with investment advisors for management of the contributed funds. The participant may select among various investment options, but may not have any control over actual investment of the funds.

A qualified state tuition program is an attractive estate planning arrangement. The donor-participant may remove the contributed funds from his or her gross estate, yet retain the ability to choose the beneficiary among family members. Unlike funds contributed to a child's or grandchild's trust, funds contributed to the plan grow income tax-free. Annual exclusion contributions for the next five years may be made during the current year. When distributions are made to the student-beneficiary, they are taxed at the beneficiary's rates (or maybe not at all if proposed legislation is passed).

Alaska has added asset protection to the above-described benefits. An account is exempt from a claim by the creditors of a participant or of a beneficiary, and is conclusively presumed to be a spendthrift trust. The statute further states that the account is "not an asset or property" of either the participant or the beneficiary, and may not be assigned, pledged, or otherwise used to secure a loan or other advancement. The account is not subject to involuntary transfer or alienation.

The Board of Regents of the University of Alaska is given the authority to administer the plan. At a future date, the Board will select and contract with an investment manager. The Board will establish limitations relating to maximum and annual contributions, the penalty for a non-qualified withdrawal, and similar plan matters.

Alaska's new act was enacted by Senate Bill 186, and is effective March 16, 2000.