Income shifting. In many cases, transferring ownership of assets to children can save taxes. You and your spouse can transfer up to $20,000 a year in cash or assets to each child with no gift tax consequences. For children over 13, the '95 income from the assets is taxed entirely to them at their lower tax rates (15% in most cases, after a $650 standard deduction). For children under 14, only the first $1,300 of '95 income achieves tax benefits ($650 via the child's standard deduction and $650 subject to the child's tax rate). Under the "kiddie tax" rules, the under-14 child's '95 income above $1,300 is taxed at your rates.

A variety of trusts or custodial arrangements can be used to place assets in your children's names. Note, it is not enough just to transfer the income to them, e.g., dividend checks. The income would still be taxed to you. You must transfer the asset that is generating the income into their names.

Tax-exempt investments. A second way to achieve economic growth while avoiding tax is simply to invest in tax-exempt bonds or bond funds. Interest rates and degree of risk will vary on these so care must be taken in selecting your particular investment. Some tax-exempt bond funds offer "insured" investments which trim the return but provide an added measure of security.

I'd like to alert you to be careful about one type of "exempt" investment you may have heard of: Series EE U.S. savings bonds. In fact, if bond proceeds are used for qualified college expenses they may be exempt from Federal income taxation. The bonds must be purchased by you in your name (not the child's) or jointly with your spouse. The proceeds must be used for tuition, fees, etc. (not room and board). If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt.

Here's the danger: if your adjusted gross income (AGI) is too high, the exemption is phased out. Based on the 1995 rates, the exemption starts to "disappear" when your (joint) AGI hits $63,450 and is gone entirely if your AGI is at $93,450 or higher. (These figures are adjusted annually for inflation.) Accordingly, for many taxpayers the savings bond exemption offers no tax savings.

Life Insurance and IRAs. Other good ways to accumulate savings for college costs involve taking advantage of the tax benefits inherent in life insurance and individual retirement accounts (IRAs). The cash value in a life insurance policy will grow without being taxed currently. Then, it can be borrowed against or even withdrawn (with possible tax consequences then) to help pay college costs.

Similarly, the funds you have in an IRA enjoy favorable tax treatment and can be used when needed for college. In general, withdrawals before age 59 1/2 suffer a 10% penalty. However, if a withdrawal schedule is set up based on annual withdrawals for life, the penalty is avoided. You can terminate the withdrawals once you reach age 59 1/2 (as long as they lasted at least five years).

The above are just some of the tax-favored ways to build up a college fund for your children. If you wish to discuss any of them, please contact your CPA.