Providing for your children, grandchildren or other young relative’s education is another way to provide for your family after you’re gone, as well as create another trust for your estate plan. These trusts aren’t traditional trust funds, but a 529 college savings plan to be used for educational expenses.
Two Types of Educational Trusts
Do you want to leave the money to your beneficiary now, or later? It makes a difference:
- Living Trust, which can be used while you are still alive
- Testamentary Trust, which is activated after you die
Whichever you chose, you will need to decide:
- How you will fund it, and with how much
- Who the beneficiary will be
- Who the trustee will be
- Exactly how the money will be used, including educational expenses
- How the money will be distributed
- What kind of education will qualify
- Termination of the trust, including ages of beneficiary, and transfer of funds to another beneficiary if the funds aren’t used by a certain date or age
- What happens if the beneficiary dies before he or she uses the funds
If you have more than one child, grandchild, niece or nephew, you can establish a “pool account” with money used for all of their educations, or an educational trust for each individual. The second option may be better, since each one can have a trustee, such as a parent, who understands their child’s educational plans better.
How The Money Can Be Used
This is entirely up to you. You may specify that the trust beneficiary go to one particular college or university, such as the University of Chicago, or that they attend a college or university specifically in the state of Illinois, or in the US. But by doing that, you may limit your beneficiary’s educational choices.
However, the more flexibility you allow in the types of educational programs, the more options the potential student will have available. The upsurge of accredited online college degrees opens up a number of educational options that weren’t available 25 years ago. You can stipulate that the monies are to be used for accredited online education as well, and many established, accredited universities have online certificate and degree programs. One example is Tulane University’s School of Public Health and Tropical Medicine’s online MPH program, designed for working adults already in the field. Without the option for online education, a student may be unable to take additional training that they may be interested in or could benefit them in their career.
Even if the student has financial aid or scholarships to pay most of their expenses, things like books, additional fees, supplies, computer-related expenses, and room and board qualify for 529 payments if they are at least a half-time student.
Postsecondary education doesn’t always mean a 4-year college degree. Some beneficiaries may choose to forego the degree program in favor of a trade school, or other alternative education program that you can still use the 529 account for its expenses.
SavingForCollege.com offers an online tool that can help you make the right decision about a 529, and whether your 529 is suitable for the type of education your student is interested in pursuing.
The No-College Beneficiary
If your intended student decides not to seek post-high-school education, joins the military, Peace Corps, or finds a job that includes tuition assistance as an employee benefit (such as Starbucks’ College Achievement Plan), the money doesn’t have to be wasted.
While you may have designated a beneficiary, you still own the money, so you can go to college yourself. Do you have another relative who would like to go to college, and could use the help? You can change the beneficiary once per year. If you decide to go back to college and use only a portion of the funds, you can designate a different relative to receive the rest for education.
It may also be worth it wait out your reluctant student, because they may, at some point, change their mind about furthering their education. If that doesn’t happen, changing the beneficiary is your next best option.
The Caveat For Cashing Out
If you decide that you’d rather not keep the trust in place, you can cash it out. But because one of the benefits of these 529 accounts is its freedom from federal tax, there are drawbacks to doing that.
You will pay both federal income taxes on the cash, as well as a 10% penalty on the earnings. A much better option would be to change the beneficiary to another family member who is interested in post-high school education, or even yourself.
Before considering cashing out the account, make sure that you speak with an estate planning attorney who understands these kinds of trusts. He or she can advise you on the best way to handle a trust account you no longer want to keep.
Considering a 529 Educational Trust For Your Family?
If you’re considering a living trust to begin distributing a lifetime of assets, it’s important to work with an estate planning attorney who understands them. 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.