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Education Trusts

For many of my clients, a chief goal of estate planning is to provide for the education of a child or grandchild. One can accomplish this goal through the use of an education trust, a special type of trust established to fund the educational expenses of one or more beneficiaries. There are three main types of education trusts.

The first kind of education trust is what’s referred to as a 2503(c) Minor’s Trust. Believe it or not, the federal government taxes gifts. That’s right: you must pay the federal government for giving away your own money! Luckily, each individual has a lifetime exemption from federal estate and gift taxes. For people who die in 2016, the exemption is $5.45 million. What’s more, one can make gifts of up to $11,000 per year which do not count against their lifetime exemption. Estate planners and tax professionals call this the annual exclusion amount. Normally, the annual exclusion amount applies only to gifts of a present interest; in short, that means it does not apply to gifts made under an estate plan. However, pursuant to Section 2503(c) of the Internal Revenue Code, there is an exception to the aforementioned rule concerning trusts payable for the benefit of somebody under 21 years of age. The trustee can make distributions from a 2503(c) Minor’s Trust to cover the costs of the minor’s education. Whenever the minor turns 21, the trust terminates and unspent funds pass to the beneficiary’s estate.

Another type of trust employed for educational purposes is the Health and Education Exclusion Trust (HEET). The HEET benefits both charitable and non-charitable beneficiaries. The charity receives income from the trust at least annually. As to the non-charitable beneficiaries, the trustee of the HEET has discretion to make distributions for health and education expenses. The primary advantage of a HEET is that it avoids application of the generation-skipping transfer tax, a federal tax typically charged on transfers from a grandparent to a grandchild. For this reason, the HEET is a great tool enabling a grandparent to provide for a grandchild’s education without triggering negative tax consequences.

Finally, one can set up a good old fashioned revocable living trust to meet the educational goals they have for their loved ones. Instead of trust funds going outright to the beneficiaries upon your death, the trust document directs the trustee to continue holding the funds for the benefit of your beneficiaries and to make distributions for educational purposes.

As you can see, there are several options to make sure the next generation can get a good education if something happens to you. While it requires a bit more work than basic estate planning, the extra effort can put the next generation on a path to success for decades to come.