Pay For a Loved One’s Education With an Education Trust Fund

Pay For a Loved One’s Education With an Education Trust Fund 

Today’s parents are all too familiar with the budget-busting cost of funding a child’s college education. It can be challenging enough to put aside sufficient savings for a single child’s education, but for multiple kids, the price tag can make donating a kidney for extra cash seem downright reasonable!

In fact, a survey by The College Board found that the “moderate” cost for all expenses (tuition, fees, books, room, and board) for a year of in-state public college averaged $24,610 in 2016-2017. A similarly moderate budget for a private college averaged $49,320.

But don’t freak out just yet! If you’re savvy about estate planning, you can use an education trust fund to save for your child or grandchild’s education expenses and specify exactly how you want those funds used.

 

Create an Education Trust

You can create an education trust that is payable during your lifetime (living trust) or upon your death (testamentary trust). The disbursements from the trust are designated for a beneficiary’s education, and you can specifically designate how and when the funds are to be distributed—meaning the beneficiary can only receive the funds if they’re compliant with your terms.

Education trusts can be used to fund not only a traditional university education, but any type of learning institution, such as trade schools, educational workshops, community colleges, and private academies. Or even alternative education, such as travel, workshops, retreats, business building programs, and the like. You get to decide exactly how broad or how limited the use of the funds can be.
Trusts can be created for multiple beneficiaries, whether through separate trusts for each individual or a single trust that funds all beneficiaries. If a single trust is established for multiple beneficiaries, you can require the assets to be distributed in a number of ways: equally, using a set amount, by percentage, or the decision as to how much each beneficiary receives can be left to the trustee’s discretion.

Education trusts aren’t generally set up as tax-saving vehicles, as would be the case with a traditional 529 Plan (which does provide tax savings but has much more restrictive use). That said, there could be some tax savings if the income of the trust is taxed at your beneficiary’s tax rate, which could be lower than your personal tax rate on income.

 

Taxes and Financial Considerations of Education Trusts

The only part of the trust that will be taxable is income earned by the investments in the trust (interest and dividends). The trust owes yearly income taxes on income above $600; however, if the trust distributes that income, the beneficiary is responsible for paying taxes at their rate.

The trust is only responsible for taxes on income not distributed by year’s end. And that income is taxed at trust tax rates, which could be higher than the beneficiary’s rate—and possibly even higher than your personal tax rate, so make sure you are clear about whether income should be distributed before year’s end for each year the trust earns income.

If the education trust is irrevocable, meaning that the gift cannot be taken back, and the amount contributed is less than the annual gift tax exemption amount ($14,000 in 2017), then no gift-tax return is required. If the gift exceeds that amount, then it would be necessary to file a gift-tax return, reporting the gift and using up part of your lifetime exemption of $5.49 million. A married couple can exempt $10.98 million in their lifetime.

 

Contact a Personal Family Lawyer® Today!

If you’re interested in funding your children’s or grandchildren’s education using an education trust, a Personal Family Lawyer®, can walk you step-by-step through the process.

 

Talk to a Personal Family Lawyer® About Protecting Your Estate 

Contact

  • This field is for validation purposes and should be left unchanged.

 

 

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone

Written by Lilac City Law

Lilac City Law

Lilac City Law offers more than just a legal service—we provide an experience designed to help you get precise, personalized results. We believe this approach is more pleasant for you during your time of need, and more importantly, it can completely reshape the outcome of your legal efforts. Our team offers a combination of experience, attention to detail, and knowledge to help you get dependable results.