Education Trust Funds | Flexible for Traditional and Alternative Education

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The Law Office of Jordan W. Jacob

Your Lawyer for Life...and After™

Education Trust Funds Are Little Known and Highly Useful

Written by Jordan W. Jacob, Esq.

June 30, 2020
Ari pays for child education costs

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 its most recent survey of college pricing, the College Board reports that a moderate college budget for an in-state public college for the 2020-2021 academic year averaged $21,950. A moderate budget at a private college averaged $49,870.

If you are 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.

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 are compliant with your terms.

How can an Education Trust fund be used?

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. An Education Trust can also be used to fund alternative educational activities, such as travel, workshops, retreats, business building programs, and the like. As the creator of the trust, you get to decide exactly how broad or how limited the use of the funds can be.

Education Trusts can also 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: (i) equally, using a set amount; (ii) by percentage; or (iii) the decision as to how much each beneficiary receives can be left to the trustee’s discretion.

Ari pays for child education costs

Tax implications

Education Trusts are not 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.

The only part of the Education 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 $2,600; however, if the trust distributes that income, the beneficiary is responsible for paying taxes at their rate.

The Education 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 —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 (up to $15,000 in 2020), 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 $11.58 million (as of 1/1/2020). It is important to note that a married couple can also combine their individual lifetime gift tax exemption and pass on $23.16 million!

If you are interested in funding your children’s or grandchildren’s education using an Education Trust fund, schedule a no-cost initial consultation with me so we can discuss the process.

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