Saving for a college education is more important than ever. Did you know you can update your estate plan to include ways to help cover college tuition and more? By making a college fund part of a more considerable trust for your estate plan, you can realize benefits such as increased control over fund distribution, tax advantages, and more expansive investment options.
When deciding which form of savings is best, consider these trust options to include money for one’s education in your larger financial plan. Trusts can be customized for your financial and educational 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 helpful tool when working funding for college costs into your overall finances. So, what kind of trusts are there?
529 plans within a trust
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
The 529 Plans offer two primary benefits. First, the Assets grow tax-deferred and are withdrawn tax-free for qualified expenses, and second, contributions made by parents and grandparents are considered a gift, providing estate planning benefits.
Many 529 plans allow for a contingent owner to take over if the owner cannot manage the plan. Naming a trust as the contingent owner may work for grandparents who want peace of mind knowing their wishes will be fulfilled 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.
529 Plans were initially intended to provide parents of young children the ability to save and invest money for future anticipated college-related expenses, but recent changes now allow funds to be used for private elementary and high school expenses up to $10k/year rather than just college-related expenses.
Section 2503 (c) trusts
A 2503(c) trust, or minor’s trust, is a trust established to hold gifts for one child until they attain age 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. However, these trusts 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)
The Health and Education Exclusion Trust (also known as HEET) is a dynasty trust intended to pay medical and tuition expenses of persons two or more generations younger than the person who creates the trust. Usually, grandparents make a Health and Education Exclusion Trust to benefit their grandchildren. These trusts are designed for generation-skipping transfer (GST) tax purposes.
If a HEET is funded while an individual is still living, it is an irrevocable trust, and the assets that have supported the trust are not considered part of the donor’s estate. However, HEETs do require at least one beneficiary to be a charitable organization.
With one of these options, you can reduce the stress of trying to fund your loved one’s education. If you have any questions about these or other ways you can use your estate plan to save for college, contact us today for a free consultation.