In Part 1, we talked about two things that can influence how and in whose name it makes sense to save money for college: the Kiddie Tax, and how college need-based financial aid treats assets depending upon who the owner is.
In Part 2, we examined 529 Plans more closely.
Now in Part 3, we’ll consider how a combination of 529 Plans and Trusts might be a good approach for some.
It is a rare family that would use lifetime irrevocable trusts to save for a child’s education, as typically the only reason for putting money into an irrevocable trust for such a purpose would be if the family were creating irrevocable trusts for estate tax planning purposes, meaning a married couple with assets in excess of $22.80M.
But what if you are “middle-wealthy”? You have enough funds for yourself. You’d like to set something aside for your young grandchildren for college now, rather than waiting and leaving it to them as part of your estate plan. This is a lovely gift that your grandchildren will be able to appreciate while you are living, and one that also helps your grown children as well, since you have provided some relief from the costs of college for their children.
You might choose a combination of 529 Plan and Trust:
- Fund a 529 Plan for each of the grandchildren. Put in just amounts that aren’t likely to leave unused assets subject to taxes and penalty. The most you can put into a grandchild’s 529 Plan is $15,000 per year (including any other gifts you made to that grandchild, with certain exceptions like direct payments of tuition and medical expenses). There are lifetime investment caps that vary by state: in Massachusetts, the maximum account balance is $400,000.
- If you expect your grandchildren to qualify for significant need-based financial aid, make the 529 Plan owner your child, so that distributions from the Plan are not counted as income of the grandchild for financial aid purposes. Otherwise, leave the plan as owned by the grandparent.
- Establish a trust with additional amounts to pick up education costs where the 529 Plans fall short. These are likely to be fully counted as assets of the grandchild, so take care with this if you expect your grandchild to be able to qualify for need-based financial aid.
In this manner, you get some tax-free investing with the 529, and the flexibility and benefits that come with a trust.
A trust offers far more flexibility for all concerned.
- You can invest in growth assets, not available in a 529 Plan, that could potentially outweigh the advantages of tax-free growth in a 529 Plan.
- The trust can incorporate your custom wishes and desires: for example, it could require the grandchild to maintain a certain GPA.
- The trust is not restricted as to what it can spend money on (unless you write those restrictions into the trust).
- If the money is not completely used for education by a certain age, the trustees might be given direction or flexibility to give the grandchild money for a down payment on a home, or to start up a business. Or the funds can revert to the parent (your child) at that time.
- For even more flexibility, a single trust can be used to supplement all the grandchildren’s 529 Plans, so if more is needed for one grandchild than another, or there is a large age difference among them, the trustee has the flexibility to deal with these. The rules are set by you when you create the trust.
- Provisions can be made for a special needs grandchild in such a way as to preserve eligibility for public benefits.
- Within some limitations, the trust can also be structured and operated so that there is no gift tax upon trust funding, and income-taxes on trust assets may be payable by you, or the trust, or the grandchild.
Special Needs Law Group of Massachusetts can advise you on creating an estate plan that fits your unique circumstances and may include funding a college education. Learn more about Special Needs Law Group of Massachusetts here.
This blog post does not constitute legal or tax advice, even if you are presently a client of Special Needs Law Group of Massachusetts, PC, nor is an attorney-client relationship created by reading it. If you want legal or tax advice, you should retain a licensed attorney or tax advisor for that purpose.