If your children or grandchildren are on their way to starting their college education, you are probably curious about how to help them achieve their dreams. There are many ways to fund an education, but two of the most popular choices are the 529 College Education Plan and an Education Trust.
The 529 Plan
The first option is the 529 Plan, a beneficial account because, although contributions to the account are not deductible on federal income tax, the growth of the account is, in fact, tax deferred. When you use a 529 Plan for educational expenses that meet certain requirements, the growth passes tax free, and it can then be used for those qualifying expenses with no tax due on the gain.
The account must have an owner (usually a parent or other relative) and can only have one beneficiary. The owner can change who the beneficiary is, but there cannot be more than one at a time. The owner can also name a successor to handle the account in the event of their death. Another convenient feature is that anyone can make contributions to the account, but the owner is the only person who can withdraw money from the account.
A 529 Plan is not necessarily for everyone, and there are a few disadvantages. For example, the account owner is in control of the account, rather than the donor. If the owner and donor are different people, the account owner’s plans may not always match up with the donor’s. If two grandparents decide to contribute $20,000 to a 529 Plan for their granddaughter and her parents get divorced, her mother (the named account owner) could decide to spend the money on something else. She could withdraw from the account, use it to pay income taxes and penalties, and spend the rest of the money. It might seem unlikely that an account owner would go against the donor’s wishes, but unfortunately these things do happen.
The Education Trust
An Education Trust can be a useful alternative, particularly when dealing with a larger sum of money. The donors who create the trust decide who will be in charge and who will be the beneficiaries (unlike a 529 Plan, more than one person is allowed). They can provide detailed instructions regarding which expenses the funds can be used for, as well as maintaining flexibility should the circumstances suddenly change. An estate planning lawyer can explain the details, including how to distribute funds among beneficiaries and how to place limits on how they can be used.
An Education Trust can include provisions built into a general living trust, which would not be funded until the death of the donor, or it can be what is known as a “standalone” trust, one that would be funded while the donor is still alive. The majority of Education Trusts are the first kind, and the latter is most often used when the person making the trust wants other family members to be able to put money in it as well.
Estate planning should help you create a solid legacy upon which to build your family’s future. To learn more about setting aside funds for education expenses, contact Queens probate lawyer Richard Cary Spivack, and plan with confidence.