One approach would be to hire an attorney to help you establish a trust that names the child as beneficiary, says college money expert Joseph Hurley of Bankrate.com. The terms of the trust would control the use of the funds, and the trustee would be responsible for investing the assets, filing tax returns and making the appropriate distributions. You could name yourself as trustee, or find a bank or other professional fiduciary to fill that role.
However, Hurley warns, the effort and expense of managing the trust can be substantial, and may exceed the amounts you originally had in mind.
A more economical alternative to making sure your friend's child's future education is covered is using a 529 college savings plan, which allows you, as well as others who wish to help fund it, to make contributions. Although your contribution isn't deductible on your federal tax return (in many states you can write off at least a portion of what you save), the account would grow tax-deferred and be distributed tax-free when the child starts college.
An important consideration when using a 529 plan is naming an "account owner." The account owner in a 529 plan retains unrestricted access to the funds, so you probably don't want to put yourself in that role, since other potential contributors might feel the funds are not being adequately protected. Instead, says Hurley, name the child's surviving parent or guardian owner, who is likely to use the funds just as you intended.
As yet another alternative, you could arrange the account under your state's Uniform Transfers to Minors Act, or UTMA, which mandates that the fund's custodian ensure that the money is used only for the child's benefit. When the child reaches the age of 18 or 21, he or she assumes direct ownership of the account and its remaining assets.
By Marshall Loeb