Shopping Around to Open a Coverdell Education Savings Account

Not every bank, savings and loan company, and mutual fund company offers Coverdell Education Savings Accounts (ESAs). Check around and ask questions. Financial institutions must apply to, and be approved by, the IRS in order to offer Coverdell accounts. A good place to start your search and gather information about available custodians and trustees is IRS Announcement 2002-12.

IRS Announcement 2002-12 clearly sets out the rules that govern which companies may act as a non-bank trustee or custodian of Coverdell ESAs. This announcement also contains a list of the non-bank trustees and custodians. When you investigate non-bank custodians or trustees, you need to know that they must provide you with a copy of the IRS notice of approval before they can accept your account.

Announcement 2002-12 provides names and addresses of approved non-bank trustees and custodians, and some of the names on the list may surprise you. The list includes not only credit unions, mutual fund companies, and brokerage firms but also financial advisors and insurance companies (but remember, you can’t invest in life insurance products inside these accounts).

Some foreign banks are also on the list, as are a few truly unexpected entries — the Berklee College of Music, the Christian and Missionary Alliance, and the El Paso Electric Company. Clearly, one doesn’t need to be purely in the business of financial services to apply for and be approved as a non-bank trustee or custodian of Coverdell ESAs.

Since December 31, 2001, the IRS has approved other non-bank trustees and custodians to offer Coverdell accounts. If, in your investigations, you find a plan that looks good and that you want to participate in, just make sure that you receive a copy of the necessary notice of approval from the IRS before you open an account and hand over your money.

Regardless of whether the plan you choose is sponsored by a bank, an institution listed on Announcement 2002-12, or a more recent entry into the Coverdell game, your custodian or trustee must provide you with a copy of the trust or custody agreement governing your account before you ever open the account. Very frequently, it’s attached to the actual application; keep this agreement as part of your permanent records.