Saving for School: Use Your Estate Plan to Pay for Your Family’s Education

Gabriel Katzner - October 5, 2020 - Estate Planning
San Diego Estate Planning Attorney
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According to the National Center for Education Statistics, in the 2018–2019 academic year, the average tuition and fees for a public four-year institution were $9,200; $35,800 for a private nonprofit four-year institution; $3,700 for a public two-year institution; and $18,400 for a private nonprofit two-year institution. If you’re saving to pay tuition for yourself or a family member, include any of the following tools in your estate plan; these can help you reach your goals. 

  • Health and Education Exclusion Trust

A health and education exclusion trust (HEET) is an irrevocable trust that can help you avoid paying gift and generation-skipping transfer (GST) taxes on tuition and medical care expenses for younger relatives. The individuals you support must be two or more generations younger than you (grandchildren, great-grandchildren), and tuition payments made directly from your HEET to an educational institution are not subject to gift tax. If they are made on behalf of a “skip person” from a non–GST tax-exempt trust, these payments are not subject to the GST tax. In order to qualify for these benefits, at least one trust beneficiary must be a charitable organization with significant interest. This estate planning option will work well if you are charitably inclined and want to support multiple generations as they work toward their education goals.

  • Irrevocable Gifting Trust

An irrevocable gifting trust uses either the annual gift tax exclusion or the lifetime gift tax exemption to hold and invest property for your chosen beneficiaries for purposes that can extend beyond education. You can use the annual gift tax exclusion to shelter gifts to the trust for gift tax purposes if you include a Crummey power. A Crummey power is a technique that allows your beneficiary to receive a gift that would not usually be eligible for gift tax exclusion but makes the gift eligible. To accomplish this, after each annual gift is made, your beneficiary must be given an opportunity to withdraw the amount that was gifted. However, the beneficiary will often leave the money in the trust to ensure that you will keep making the annual gifts according to the original plan. 

  • Provision in a Revocable Living Trust

If you already have an existing revocable living trust and your trust includes a provision for the payment of your child’s or grandchild’s education expenses, you can help the child even if you pass away before the education is completed. After your death, the money will be available to be used as you have directed. During your lifetime, you can change the trust provisions as often as you like, including your wishes for how the money should be spent. Your definition of education expenses can be as broad or as narrow as you want, and not all of the money in the trust must be used for education expenses.

  • Revocable Education Trust

A revocable education trust provides substantial flexibility, as it allows you to set up a trust, act as a trustee, and make distributions for your chosen beneficiary’s education, but it can be revoked or revised if you choose. If the funds are needed for other purposes or if the beneficiary does not attend college, you can easily alter the provisions of the trust. This option will not provide the tax benefits of other trusts or education plans, but it’s a wise choice if you value flexibility. 

  • 529 Plans

A 529 plan is a savings plan that uses tax advantages to encourage people to save for their young relatives’ future education costs. There are two types of 529 plans: prepaid tuition plans and education savings plans. 

  • Prepaid Tuition Plan

A prepaid tuition plan allows you to purchase units or credits for your beneficiary’s future tuition and pay any mandatory fees in advance at the current prices, so you can avoid paying the higher costs that may be charged in the future. These plans are usually available only for public and in-state colleges. They cannot be used for room and board, and they can’t be used to prepay tuition for elementary and secondary schools. If the beneficiary later decides to attend a private college or university, prepaid funds can be applied to tuition at most institutions.

  • Education Savings Plan

An education savings plan lets you open investment accounts to save for qualified higher education expenses. Your accounts can be used for tuition and fees, but also for college expenses such as room and board, computers, and software. You can also use this account to pay for education expenses at some international institutions. Up to $10,000 can be used for elementary and secondary school tuition. 

  • Coverdell Education Savings Account

A Coverdell education savings account (ESA) can be used to fund qualified education expenses. Although the contributions are not deductible, the distributions and growth are tax-free if the funds are used for this purpose. Unlike some other options, the Coverdell ESA can be used for elementary and secondary education without a monetary cap. In contrast to a 529 plan, this program has an income limit (adjusted gross income must be less than $110,000, or $220,000 for those filing a joint return), as well as a contribution maximum ($2,000 per year per beneficiary).

  • Uniform Transfers to Minors Act and Uniform Gifts to Minors Act Accounts

The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts are types of trusts that allow a custodian to manage money and property on behalf of the minor owner. However, unlike other types of trusts, UTMA and UGMA accounts do not require that any trust documents be prepared or that a court appoint a trustee. All of the required trust instructions are spelled out by state law. Until the minor reaches the age of majority in that state, the custodian must manage and use the funds for the benefit of the minor, which can include education expenses. However, once the owner reaches the age of majority, the money is turned over to him or her, and the owner can now choose how it is managed and spent.

  • Impact on Financial Aid

Setting aside money for a child’s or grandchild’s education expenses may reduce qualifications for need-based financial aid. The identity of the account owner impacts whether the account must be disclosed on the Free Application for Federal Student Aid (FAFSA) and the weight it will be given in the need-based calculation. Additionally, most types of trusts must be reported on the FAFSA as an asset of the beneficiary.

  • We can Help

Our team can work with you to craft a plan that accomplishes all of your family’s education goals and sets them up for the future. We are available to meet in person or by video conference; please let us know which you prefer.

You can use the link below to schedule a call with Gabriel Katzner, or just call us at 855.528.9637 to learn more about how best to plan today to protect those most important to you




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