Planning For Your Family Future

Protect Your Legacy Today!

3 Critical Considerations For How To Save For Your Child's (or Grandchild's) College Education- Part 2

August 12, 2022 •  Legacy Law LLC
If you have started to save for your child or grandchild’s college education, it’s worth considering whether to use a 529 plan, an education savings account, or an irrevocable trust.  Last week, in part one of this series, we discussed 529 plans and education savings accounts, which are both popular options for saving for a […]

If you have started to save for your child or grandchild’s college education, it’s worth considering whether to use a 529 plan, an education savings account, or an irrevocable trust. 

Last week, in part one of this series, we discussed 529 plans and education savings accounts, which are both popular options for saving for a college education. One of the main reasons for their popularity is their tax-saving advantages. The money you contribute to a 529 account grows on a tax-deferred basis, and withdrawals are tax-free, provided they are used for qualified education expenses, such as tuition, room and board, and other education-related fees.

That said, one of the downsides of 529 plans is that they come with strict limits on how you can use the funds (for education-related expenses only), and they also have a limited range of options for how you can invest your funds, primarily in various mutual funds. For these reasons, 529 plans and ESAs aren’t always the best fit for some families looking to save for their loved one's education.

Education Trusts

As we noted in part one, one alternative way to save for your offspring’s higher education is by using an irrevocable trust. Although there isn’t any income tax deferral on income earned by the assets held by these trusts, it is possible to structure a trust, so your beneficiaries could qualify for financial aid that they may otherwise be ineligible for with a 529 plan. Depending on your situation, qualifying for financial aid may prove even more valuable than savings on the income taxes owed on income earned by the trust.

Here in part two, we’ll further discuss how these trusts work and why they may be an attractive alternative to 529 plans if you are looking to save for your loved ones’ education—whether that education is college or some other form of learning.

The Benefits Of Education Trusts

In addition to the issue of qualifying for financial aid, another benefit of such trusts is that you can not only save for a single child’s or grandchild’s education, but you can also structure your trust to provide a pool of funds for the education of all family members. Moreover, when creating the trust, “education” can be broadly defined to include any type of learning institution or organization, such as trade schools, educational workshops, community colleges, and private academies, to name just a few options. 

Furthermore, you can provide that the trust can pay for alternative education, such as travel, retreats, business building programs, and other nontraditional educational experiences, which may prove even more valuable than college. Bottom line: when you set aside money to educate your family with an education trust, you get to decide exactly how your beneficiaries can use the funds by what is most in alignment with your family values. And as part of creating your education trust, we will work with you to create a written set of guidelines for the trustee, who will be the person making decisions regarding distributions to the beneficiaries. 

Trust Creation Options

In terms of how the trust is set up, you can create an education trust that is built into your revocable living trust or will, and as such, it would not get registered and funded until your death. Or you can create an education trust that exists and is funded during and throughout your lifetime. In either case, the disbursements from the trust are designated for a beneficiary or a pool of beneficiaries' education.

While you can stipulate how and when the funds are to be distributed inside the terms of the trust agreement itself, we would almost always provide the trustee with broad distribution authority and discretion (to maximize the asset protection benefits of the trust), and create a separate writing to provide guidelines on distributions, and then give a trusted person, or group of people, the right to remove and replace the trustee with someone else should your first choice not work out for any reason.

If a single trust is established for multiple beneficiaries, you can require the assets to be distributed in several ways. You can stipulate that the funds are divided equally among the beneficiaries, disburse the funds in a set amount, by percentage, or you can leave the decision as to how much each beneficiary receives to the trustee’s discretion.   

Tax Implications

Education trusts typically aren’t set up as tax-saving vehicles, as is the case with a traditional 529 plan, which does provide tax savings. That said, as we noted earlier, 529 plans have much more restrictive rules for how their funds can be used. Moreover, you could save on taxes with a trust if it is drafted in a way that allows the trust’s income to be taxed at your beneficiary’s tax rate, which could be significantly lower than your personal tax rate.  

If you establish an irrevocable trust for education purposes, make sure you consider all of the tax impacts on income earned by the trust. For example, the trust would be taxed on income not distributed by year’s end, but you can have the trust drafted to pay out all income to the beneficiary or include other provisions that cause the trust to be taxed to the beneficiary (even if income is retained).

That income would be taxed at trust tax rates, which could be higher than the beneficiary’s rate—and possibly even higher than your personal tax rate—so it’s important you are clear about whether income should be distributed before year’s end for each year the trust earns income. 

If the education trust is irrevocable, meaning that the gift cannot be taken back, and the amount contributed each year is less than the annual gift tax exemption ($16,000 in 2022), then no gift-tax return is required to be filed. Conversely, if the gift to the trust exceeds that amount, then you will need to file a gift-tax return, reporting the gift and using up part of your lifetime exemption of $12.06 million if single and $24.12 million if married filing jointly.

Since there are so many variables involved and different ways to set up an education trust, it’s vital to reach out to us, your Personal Family Lawyer®, so we can walk you step-by-step through all your options—and help you determine what’s best for your unique situation.

Potential Problems To Keep In Mind

One alternative to these plans (both 529 plans and education trusts) is to use money that has been saved for other purposes, such as funds you have saved for your retirement. However, it's important to point out that using your retirement funds can affect your child’s eligibility for various need-based financial aid programs. To this end, retirement funds withdrawn to pay college expenses are reported on the Free Application for Federal Student Aid (FAFSA) as additional income.

Consequently, when using retirement funds, the expected family contribution used from FAFSA will be higher, which will therefore reduce your child’s chances of qualifying for financial assistance. Consult with us if you choose to tap into your retirement savings to fund college expenses, so we can ensure it's done right and will have the maximum benefit for everyone involved.

Don’t Do-It-Yourself

To ensure you get the most benefit from your savings, don’t try to make these decisions on your own. As your Personal Family Lawyer®, we will work with you to determine the best way to set aside financial resources for the people you love, whether that’s using a 529 plan, an education trust, or some other option. Contact us today to learn more.

This article is a service of Bethany Gilson Casey, Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

Speak With an Attorney


Schedule Now

Client Success Stories

Bethany was amazing very helpful and kind. Made me feel very comfortable in a rough situation. Made sure I got what I wanted set up and took care of me and my family. Awesome job. I recommend her 100%.
Cari Covolo
December 22, 2021.
Bethany was professional, very knowledgeable, personable, and easy to work with. She made the daunting task of setting up a will easy and seamless.
Amanda Larson
October 21, 2021.
Bethany was great! She explained the details of probate and how it works in detail. Our purpose was to protect our children in the untimely event of both of us passing at the same time. The estate planning put our minds at ease. She encourages us to follow up with her periodically and make sure everything is still in order. This impressed us, she cares.
Dale Arey
October 13, 2021.
Bethany was great to work with! We highly recommend Legacy Law. Bethany was always well prepared and made things feel simple and easy to understand. She made a process that can feel overwhelming feel simple and manageable to do. She is very organized, professional and caring. She did an excellent job in preparing all the estate documents and helping us create a living trust!
Carey Larson
October 8, 2021.
Bethany was really helpful in getting our trust set in place; she answered all our questions thoroughly and we have peace of mind that our estate and affairs are in order. Highly recommend!
Paul Alvey
September 6, 2021.
I was pretty nervous/unsure about needing a will/ trust and decided to explore my options. I found an introductory video on-line from Legacy Law. From there I set up a meeting with Bethany and went in with a boatload of questions. My questions were answered patiently and with great expertise. I never felt pressured and came out feeling reassured and comfortable with my choices/decisions. This was all done professionally and in a very timely manner. To this day, if I have a question all I have to do is give Bethany or Brynn a call. It is without hesitation that I recommend Legacy Law and their services.
Patsy Christensen
August 31, 2021.
Thank you LegacyLaw Estate planning was a breeze with them .
Deborah Doak
August 21, 2021.
Bethany was great! Very professional and personal. She was always able and willing to answer our questions and come up with the best solution for our needs. I highly recommend her for estate planning and to navigate all the legal intricacies related to that.
Jeff Wilson
August 20, 2021.
Bethany was very professional, reasonably priced and very thorough when working with us on our trust. We highly recommend her for very individualized planning and attention to detail.
Robin Schamber
August 9, 2021.
Bethany was very professional and easy to work with. She answered all my questions and helped me put together a good living trust that I feel comfortable with. I would highly recommend her to anyone who is thinking about estate planning.
Steve Boyd
August 3, 2021.
Legacy Law LLC

2620 Commercial Way, Ste. 160
Rock Springs WY 82901

Get Directions
Integrity Marketing Solutions - Estate Planning Marketing
Powered by