Estate planning can encompass a wide range of instruments that can preserve wealth and provide your grandchildren with an education that will serve them well in the future.
But just leaving them a large sum of money in your will that you’ve earmarked for “education” may not be the best idea. It’s especially risky if it’s left to them without a trustee or someone to administer the money so that they don’t spend it unwisely.
An educational trust is one way to ensure that your grandchildren can count on you to help them with higher education when the time comes.
The Educational Trust
Although you can establish a trust for nearly any reason, an educational trust is more limited in scope. As the owner, you can specify the terms and conditions on how the money is spent, and when.
You can reduce the size of your estate for tax purposes and gift each grandchild up to $15,000 per year without the gift reporting requirement. While the trust owns the assets, you do have a say in how they are invested, and the trust pays taxes on any income earned. All the funds are used for the benefit of your grandchildren.
Trust Conditions
The educational trust is, of course, to designate funds for education. The grantor can specify that the trust is for one grandchild or for more and appoint a trustee.
When will the trust become operational? If the grandchildren are very young, the trust may become operational at death. But if the grandchildren are teenagers, the trust can become operational sooner. Once the trust is funded and operational, the trustee controls it and pays educational expenses according to the set conditions.
The end of the trust is also important:
• What will happen to the remaining funds if a grandchild finishes their education and doesn’t use all the money (it can be re-designated for another grandchild or given to the original at a specific age, like 30)
• What will happen to the trust if the grandchild (or one grandchild) does not finish college or attend college at all
• What will happen if the grandchild chooses a vocational or non-traditional education
• What will happen if the grandchild chooses post-graduate education such as law or medical school
• If an online-only education can be covered
• If the child dies before reaching college age
These conditions should also be set out in the trust to ensure that every possibility is covered.
The Pot Trust
If you’re someone who has multiple grandchildren, one option is to create a “family pot” trust with a specific sum of money to cover all the grandchildren. The idea is that different family members may need different amounts of money, depending on their needs and choice of education.
The “pot trust” is commonly used for siblings but can be used for cousins as well. Giving a set amount to everyone may leave one grandchild short of funds at some point. A trustee has more flexibility in disbursing funds in a reasonable and empathetic manner should one have special needs but must still do so according to the set conditions.
An educational trust is a complex financial instrument that is very useful to ensure that your grandchildren can get an education with little or no student debt. When you’re ready to begin setting up educational trusts, work with an attorney who understands these trusts and how they can fit into your overall estate planning.
Let James C. Provenza Help With Educational Trusts
James C. Provenza is an Illinois estate planning attorney with years of experience helping clients with their estate planning to make sure their wishes are carried out. Call our firm today at (847) 729-3939, or use our online contact form.
