Leaving a legacy for your children, grandchildren, and future generations is one of the most important goals of estate planning—and there’s no better way to do that than helping to provide for their educational needs.
A 529 plan allows you to fund tuition and other educational expenses—and to do so on a tax-advantaged basis. However, there’s no guarantee that subsequent owners will use the plan in accordance with the original owner’s wishes after the original owner passes away.
A carefully designed trust avoids this potential pitfall, but trusts have a significant drawback of their own. The earnings of 529 plans are tax-exempt when used for qualified education expenses—trusts, by contrast, are subject to federal income tax at some of the highest rates in the tax code.
One way to gain some of the best benefits of both approaches is to create a family education trust—and use it to invest in one or more 529 plans.
What’s a 529 plan?
A 529 plan is a state-sponsored investment account—one that allows parents, grandparents, or other family members to make substantial cash contributions. These contributions aren’t deductible, but the funds grow tax-free, and as long as they’re being used for qualified education expenses, earnings can be withdrawn tax-free for federal income tax purposes.
Qualified education expenses include:
- Books
- School supplies
- Tuition
- Fees
- Some room and board
While any contribution made to a 529 plan is removed from your taxable estate—and is also shielded from gift taxes—529 plans do have their share of disadvantages. They include relatively limited investment choices and there isn’t any way to invest assets other than cash. And, as mentioned before, there is always the risk that the plan’s subsequent owner might use the funds for purposes other than education.
Using a trust to hold a 529 plan
Establishing a trust—and using that trust to hold one or more 529 plans—is an alternative that offers several advantages:
- A trust can hold a number of assets and investments outside of 529 plans—including noncash assets and funds held for noneducational purposes (such as medical expenses).
- Trusts allow you to explicitly specify which family members are eligible for the educational assistance they provide. You’ll also be able to control how the funds may be used or distributed if they’re no longer needed for educational purposes, and appoint trustees and successor trustees, who oversee the trust and ensure it’s used properly.
- Depending on state law, a trust may also allow you to maintain tax-advantaged education funds indefinitely—benefiting future generations while preventing those who would use the funds for other purposes from accessing them.
Contact Us to Make a Plan
Interested in setting up a family education trust? Need help designing a trust to maximize educational benefits while minimizing taxes? Contact us today—we’ll help you establish a plan that offers the flexibility you need to shape your educational legacy.