My children went back to school in August, and are still adjusting almost a month later. My kids are more tired, and so they need to go to bed earlier. They are also not sure they really love being in school. The freedom of summer is gone, replaced by homework assignments, new classrooms, and all that goes along with starting school. They still like school, for the most part, and are happy to be in school (even if they would rather just stay home and play). My children are in 8th grade, 5th grade, and 2nd grade, so we don’t need to pay for the school itself. Sure, we may be a little bitter that we paid for full day kindergarten, which is now free for Colorado kids, but we aren’t yet paying for college or other education.
I attended a moderately priced college, Brigham Young University, and I was fortunate to have scholarship money that covered tuition. My parents helped me as much as they could, but they are not so rich that they could simply pay for my education. After college, I went to law school at the University of Denver Sturm College of Law. There I had many classmates who had trust funds to pay for their education.
I did not have trust fund money to pay for law school, but instead I had to take out student loans. I am still paying them back. I made the conscious decision to pay for school, knowing it would pay off for me in the end, and it has. I also have many clients who want to help their children, or grandchildren, pay for college and other educational opportunities. I have written about the concern of getting powers of attorney for your adult children prepared to send off to college, so the focus of this blog is on funding education.
If you want to pay for your children’s, or grandchildren’s education while you are alive, there is really nothing to stop you from doing so…except, perhaps for a lack of funds. You can plan to keep helping pay for education by setting up a trust to fund education after you are gone. Trusts to fund education come in many varieties. You can designate certain funds in a trust to be used for education as part of a larger trust that holds all of your assets. You can also set up a specific trust designed only for education. If helping pay for the higher education of your children, or grandchildren, is important to you, keep reading to see what your options are.
If You’re Alive, then You Don’t Need to Pay for Education Out of A Trust
It may seem obvious, but if you are alive, you can pay for your children’s education without the need for a trust. However, I get calls from potential clients all the time who want to set up an educational trust for their children, and they are worried about paying for the children’s education. As I discuss things with these potential clients, I often have to have a conversation with them about how a trust is most useful to help pay for education if the parent is deceased.
Parents can pay for their children’s education while they are alive, if they so choose. Many clients are convinced they would save on taxes, or other costs, by using a trust, but that is not necessarily the case if you are paying for education. If you are looking for a tax break, using a tax deductible educational investment, like a 529 educational savings plan can provide a tax break, but a trust may not enhance those savings.
Of course, I am often asked how someone is supposed to save or pay for education if a person no excess money. I cannot make money appear from nowhere, but we can plan with the money you do have!
A Trust Can Pay for Education With Assets You Leave Behind
Once you pass away, there may be more assets available to pay for education, since most people have significant equity / assets tied up in their home. Your home is likely to be sold at your passing, turning the illiquid asset of a house into a liquid asset. Liquid assets can be spent on education for children, or grandchildren. If a house is kept in a trust, then the trust can dictate what happens to the proceeds from the sale of the house. A written trust agreement describes how to distribute funds, and can specify that certain funds are only to be used for educational purposes and expenses.
If you have extra money available for purposes other than a house, then you can set up the trust to distribute some funds for education, and some funds for other purposes. You can do this inside of one trust, which separates out asset for different purposes, or you can set up multiple trusts for each separate purpose. You can set up one trust for one child, or one grandchild, and another trust for each other child, or each other grandchild you may have.
Whether to use one trust that splits up funds among many children or grandchildren, or to have separate trusts is really a question of which approach captures what you want to do best. There is not just one right way to set up a trust for education, but you want to explore your options. Having multiple trusts can lead to more expenses in the form of legal fees or administrative costs and burdens, but if that meets your needs better, then that is the way to go. Having an in depth conversation with an experienced estate planning attorney to discuss your needs is an important step to determine what you want to have happen. You want to know what will work best for your before deciding how to move forward.
Trusts Specifically Set Up for Education Can Have Special Features
If you decide to have a specifically designed educational trust, then you should look at how to structure such a trust carefully. You can take advantage of some methods to leverage the assets put into trust to increase their value, if the trust is structured properly. Often, an educational trust will have something like a life insurance policy as its funding vehicle / investment. The trust creator will pay premiums on a life insurance policy on the life of the trust creator. Then, when the person who created the trust passes away, the life insurance policy will pay out a sum of money to the trust. At that point, the trust beneficiary will have the full proceeds of the life insurance policy to use for education. If those assets are not used for education, then for whatever purpose allowed by the trust agreement after education is completed. This can be an extremely useful method to fund an educational trust.
There are some important structural components to such a trust. Generally, the beneficiary would need to have the option of taking the life insurance premium out of the trust in the year it is contributed to maximize the amount contributed each year, called a Crummy power in the legal world. This allows current gift tax limits to be used and minimize the necessary gift or estate taxes due in the future. In addition, the life insurance policy needs to be set up properly with the correct owner, insured life, and beneficiary, so that the proceeds are not subject to any more tax than necessary. Educational trust that utilize this type of funding are tricky to navigate and must be set up properly to ensure they work to your maximum benefit.
You Can Get Started on a Trust for Education Today!
If you are interested in setting up a trust to fund the education of your children or grandchildren, and you want to get started, please go here to set up a meeting with an experienced estate planning attorney. You can leave a great legacy for your children and grandchildren by funding their education, if that is what you want to do.