Consider these trust options to include money for a loved ones’ education in your larger financial plan.
By making a college fund part of a larger trust for your estate plan, you can realize benefits such as increased control over fund distribution, tax advantages, and more expansive investment options.
Here are a few considerations for using trusts:
Trusts can be customized for your goals
Trusts allow you to determine how money is distributed, to whom, and when. Trusts also offer the opportunity to make clear designations for a portion of funds within a larger pool, making them a useful tool when it comes to working funding for college costs into your overall finances — including your estate and wealth transfer plans.
Section 2503(c) trusts
These trusts are created to give the trustee control over the money until the beneficiary turns 21, enabling a parent or grandparent to ensure that the money is used for education expenses. Gifts to these trusts also qualify for the annual gift tax exclusion. These trusts do, however, require an attorney to draft a trust document, which increases the setup cost. Also, they are considered an asset of the child for financial aid purposes.
Health and Education Exclusion Trust (HEET)
A HEET can be used to pay for medical and education expenses of a grandchildren or their descendants. If a HEET is funded while an individual is still living, it is an irrevocable trust and the assets that have funded the trust are not considered part of the donor’s estate. However, HEETs do require at least one beneficiary to be a charitable organization.
529 plans within a trust
Many 529 plans allow for a contingent owner to take over in case the owner becomes unable to manage the plan. Naming a trust as the contingent owner may work for grandparents who want the peace of mind knowing their wishes will be carried out by their trustee. However, 529 plans can only have one beneficiary at a time, so special care should be taken if a trust has multiple beneficiaries.
Incorporating college funds for your next generations with a trust may help reduce your tax burden while simultaneously providing for your descendant’s education expenses. Work with a financial professional to determine if this strategy is right for your overall financial plan.
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