You have undoubtedly seen the projections about college expenses. Using an average increase of 5% per year, by 2030 the annual tuition at a four year public school could soar to $41,200, and $92,800 at a private, nonprofit school.
These numbers will undoubtedly make even the well-to-do cringe. Thus, parents and grandparents are often interested in strategies to sock away money now to pay for skyrocketing college expenses.
Identifying what will be the best college-saving tool will depend on many factors, including earnings, savings, income tax bracket, risk tolerance, age, the ages of the children or grandchildren, and the potential for scholarships and other financial aid. This may be an area where trust-based options could be considered
While revocable living trusts are commonly associated as the centerpiece of an estate plan, a “special purpose” educational revocable trust can provide significant flexibility to those looking to set aside funds for a child’s or grandchild’s education, but who perhaps aren’t quite ready, for whatever reason, to make a permanent gift or earmarking of the assets
A revocable education trust puts you in control (the trust is revocable after all) and lets you focus on the goal of legacy for your family rather than on the complexities associated with managing irrevocable trusts. While alive and well, you can serve as the trustee and have complete discretion about the timing and purpose of distributions, while tailoring distributions to your family’s needs.
For example, Bob and Jane set up a trust for their grandson Nick. They add Nick as a permissible beneficiary and add assets each year to the trust without any gift tax consequences (because the trust is revocable, there’s no completed gift). If they choose to do so, they can share with Nick how much has been set aside, or they can choose to keep it private. If Nick doesn’t need the assets (say because of a scholarship or because he’s chosen to not pursue higher education), the assets aren’t trapped inside of an education-specific account, such as a 529 plan, and Bob and Jane can give them to Nick or use them for some other purpose by revoking or restating the trust. To that end, this type of trust can help Bob and Jane feel more comfortable about setting aside money, since they can still gain access to the assets if they need to, which can be challenging, costly, or impossible as a practical matter with some of the other options, like UTMA/UGMA, 529 plans, or irrevocable trusts.
While “Crummey Trusts” are commonly used to own life insurance and won’t be fully funded until after death, they can also be used as an effective lifetime gifting trust to hold funds that can be used to pay for a beneficiary’s expenses. A properly drafted “Crummey Trust” will include demand rights that allow transfers made to it to qualify as annual exclusion gifts and remove the trust assets from the trustmaker’s estate.
Planning Tip: A trust can be a flexible tool for setting aside funds to provide for the care, support and education of a child or grandchild.
How 529 Plans generally work:
- Contributions must be made in cash and must qualify for the annual gift tax and GST tax exclusions.
- Each beneficiary must have a separate account.
- Earnings grow tax-free and distributions are tax-exempt when used for higher education expenses, including tuition, fees, books, supplies, equipment, and room and board.
- If a beneficiary decides not to go to college or fails to finish, the donor can change the beneficiary to another family member of the same generation without any gift tax or GST tax consequences.
- A 529 account can be owned by a trust, providing continuity of management for trust assets (even those not used for higher educational purposes) and the possibility of greater control although there are some downsides.
Planning Tip: A non-trust-owned 529 account can be “supercharged” by funding it with up to five years of annual exclusion gifts in one year (currently $14,000 per beneficiary, or $70,000). Thus, a married couple with three grandchildren can set aside $420,000 in one year (2 x 3 x $70,000). On the downside, if the donor dies before the fifth year after funding, the gifts for the years following the year of death will be brought back into the donor’s estate.
It is important to consider the impact a trust as well as a 529 Plan, a UGMA or UTMA account will have on financial aid. In general, a student’s assets may be given greater weight than the parent’s assets, so techniques that shift assets from a parent to the student may reduce needs-based financial aid.
As part of the educational planning process, you want to consider all angles to determine the best solution given the circumstances.