Parents today are already familiar with the high cost of funding a child’s college education. Setting aside enough savings for one child’s education is tough, but for multiple children, it can seem impossible!
In the 2016-2017 school year, The College Board reports that the “moderate” cost for college expenses (including tuition, fees, books, room and board) for an in-state, public college averages $24,610 per year. For a private college, the moderate cost is more like $49,320.
These numbers may seem extreme, but all hope is not lost! If you are savvy with your estate plan, you can use an education trust fund to set aside savings for a child or grandchild’s education expenses while specifying exactly how you want those funds to be used.
There are two ways to create an education trust: one that is payable during your lifetime (a living trust) or that is payable upon your death (a testamentary trust). Using either of these methods, you can designate that disbursements from this trust are to be used only for the beneficiary’s education. You can also determine how and when the beneficiary receives these funds.
Education trusts can be used to fund traditional university education as well as any learning institution, such as trade schools, workshops, community college, and private academies. You can even allow for alternative forms of education in your trust. This might include travel, retreats, business building programs, and the like. As the grantor, you get to decide exactly how broad or limited the use of educational funds can be.
Trusts can be created for multiple beneficiaries, whether through separate trusts for each individual or a single trust that funds all beneficiary’s educations.
If a single trust is established for multiple beneficiaries, you can require the assets to be distributed by setting a specific amount per person, by percentage, or to be determined using the trustee’s discretion.
Setting up an education trust isn’t specifically done to provide tax savings, as you would with a traditional 529 Plan (which does provide tax savings, but has much more restrictive uses). However, there are some tax benefits, based on the trust and the beneficiary’s tax rates, as well as how much is distributed per year.
A trust is only responsible for taxes on income not distributed by year’s end. That income is taxed at trust tax rates, which could be higher than the beneficiary’s rate. The only taxable income for an education trust is the income earned by the investments in the trust (interest and dividends). The trust will owe yearly income taxes on income above $600; however, if the trust distributes that income, the beneficiary will be responsible for paying taxes at their own rate.
There may be some benefit as well if you set up an irrevocable trust, rather than one that can be altered within your lifetime. If the education trust is irrevocable 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.
If you are interested in funding your children’s or grandchildren’s education using an education trust, we can walk you step-by-step through the process. Give us a call at 770-933-9009 to get started.