Tag Archives: education funding

Saving for School: Planning for Your Family’s Education

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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 postsecondary education is in your family’s future, including any of the following tools in your estate plan can be an excellent way to help provide for education needs.

Health and Education Exclusion Trust

A health and education exclusion trust (HEET) is an irrevocable trust tailored to help you avoid paying gift and generation-skipping transfer (GST) taxes on tuition and medical care expenses for individuals two or more generations younger than you (grandchildren, great-grandchildren, etc.). Tuition payments made from a HEET directly to an educational institution on behalf of one of these beneficiaries are not subject to gift tax. These payments, if made on behalf of a “skip person” from a non–GST tax-exempt trust are not subject to the GST tax. However, in order to qualify for these benefits, at least one trust beneficiary must be a charitable organization with a significant interest. This can be a great option if you are charitably inclined and want to provide education assistance for multiple generations.

Irrevocable Gifting Trust

Using either the annual gift tax exclusion or lifetime gift tax exemption, an irrevocable gifting trust holds and invests property for your chosen beneficiaries for a variety of purposes, not just education. If you want to use the annual gift tax exclusion to shelter gifts to the trust for gift tax purposes, you will need to 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. You can stop making gifts at any time.

Provision in a Revocable Living Trust

If you already have an existing revocable living trust, including a provision for the payment of your child’s or grandchild’s education expenses can be an easy way to help even if you pass away before the education is completed. Upon your passing, the money will be available to be used as you have directed. One benefit is that during your lifetime, you can change the trust provisions as often as you like. Additionally, you can determine how the money should be used. Your definition of education expenses can be as broad or as narrow as you want, and not all of the money in the trust has to 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 the funds are needed for other purposes or if the beneficiary does not attend college. It will not provide the tax benefits of other trusts or education plans, but it may be a better option if flexibility is a priority.

529 Plans

A 529 plan is a savings plan that provides tax advantages designed to encourage people to save for their child’s or grandchild’s 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 mandatory fees in advance at the current prices, helping to avoid paying the higher costs that likely will be charged in the future. These plans are usually available only for public and in-state colleges, cannot be used for room and board, and cannot 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 private postsecondary institutions.

Education Savings Plan

An education savings plan enables you to open investment accounts to save for any qualified higher education expenses. The funds can be used not only for tuition and fees, but also for college expenses such as room and board, computers, and software. This account can also be used to pay for education expenses at some international institutions. In addition, up to $10,000 can be used for elementary and secondary school tuition.

Coverdell Education Savings Account

A Coverdell education savings account (ESA) is a savings account used to fund qualified education expenses. Although the contributions are not deductible, the distributions and growth are tax-free as long as the funds are used for qualified education expenses. Unlike some other options, the Coverdell ESA can be used toward qualified education expenses 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 whereby a custodian manages 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 in the state’s statute. Until the minor reaches the age of majority (eighteen or twenty-one depending on the statute), the custodian must manage and use the funds for the benefit of the minor, which can include the payment of education expenses. However, once the owner reaches the age of majority, the money is turned over to the owner, who can choose how it is managed and spent.

Impact on Financial Aid

It is important to note that setting aside money for a child’s or grandchild’s education expenses may impact the ability to qualify 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 Are Here to Help

Working together with your financial team, we can craft a plan that accomplishes all of your family’s education goals and sets them up for the best possible future. We are available to meet in person or by video conference—please let us know what is most convenient.

Education Funding Flexibility in Light of COVID-19

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When it comes to returning to school in the fall, the details may still be unknown. Will students be attending classes in person, or will classes continue to be online? Will college students be allowed on campus, or will they be bunking with mom and dad for the fall semester? One thing is certain: education will still be costly. In times of uncertainty, it is important for your planning to be as flexible as possible while still meeting your needs.

Some techniques for funding education expenses require that the funds be spent only on certain items to take full advantage of tax breaks and incentives. Other tools are less restrictive regarding how the money can be spent, allowing for more flexibility—which is important during these uncertain times.

Qualified Education Expenses Only

Coverdell education savings accounts. Money that is invested in a Coverdell education savings account must be used for “qualified education expenses.” These expenses can be incurred at eligible postsecondary schools as well as eligible elementary or secondary schools. For elementary and secondary education, qualified education expenses include tuition and fees, books, and supplies. If the school requires or offers them, room and board, uniforms, and transportation may also be deemed qualified education expenses. For postsecondary schools, tuition and fees, books, supplies, and equipment are deemed qualified education expenses. Additionally, room and board may be considered education expenses if the student is enrolled at least half-time at the institution. Items such as computers and internet access are also considered qualified expenses for students at all grade levels as long as they are primarily used by the beneficiary (and for students in elementary or secondary institutions, the beneficiary’s family) during any years the beneficiary is enrolled in the eligible school. However, this does not include expenses for software that is not predominantly educational in nature.

529 plans. A 529 plan, also known as a qualified tuition program, requires that the funds be used for qualified education expenses to avoid paying income tax and a 10 percent penalty. For 529 plans that are used to save for elementary and secondary institutions, the funds can only be used to pay for up to $10,000 in tuition. Similar to a Coverdell education savings account, tuition and fees, books, supplies, and equipment are deemed education expenses for postsecondary education at an eligible institution. Additionally, room and board may be considered an education expense if the student is enrolled at least half-time.

Tuition Only

In order for payments on the beneficiary’s behalf from a health and education exclusion trust (HEET) to be excluded from gift and generation-skipping transfer taxes under Internal Revenue Code Sections 2503(e)(2)(A) and 2611(b)(1), the funds must be paid directly to the educational organization for tuition. With respect to a HEET, education expenses can include tuition for any grade level, from preschool to postgraduate, for part-time or full-time students. However, room and board, books, and other related expenses are not deemed education expenses eligible for the tax exclusion.

Education Expenses Are Your Choice

Revocable education trusts and revocable living trusts.  A revocable education trust or a provision in your existing revocable living trust can provide you with significant flexibility. As the person creating the trust, you can allocate the money and property to cover any expenses related to education. This includes not only tuition and institutional fees, but also room and board and other personal needs associated with attending school. An additional benefit of these planning tools is flexibility: if you need to change the amount of money you have given the trust, add or remove beneficiaries, or terminate the trust entirely, you have the ability to do so without any adverse tax consequences. A significant downside of revocable trusts is that there are generally no income or gift tax benefits available for setting them up.

Irrevocable gifting trusts. Similarly, an irrevocable gifting trust allows you to define what expenses can be covered by the beneficiary’s share of the trust. The main difference is that by placing money and property into an irrevocable trust, you no longer have control over it. However, irrevocable gifting trusts can provide some tax advantages that revocable trusts cannot. The rules listed in the trust document will be used for the entirety of the trust’s existence, with some limited exceptions. Therefore, it is important to work with an experienced estate planning attorney to make sure that you plan for as many contingencies as possible.

No Major Restrictions

Lastly, a Uniform Transfers to Minors Act or Uniform Gifts to Minors Act account does not impose any major restrictions on the use of the funds. When one of these accounts is created, the money or property is held by a custodian for the benefit of the minor. Because this property is technically owned by the minor, the custodian has the responsibility to manage, invest, and where appropriate, use the property for the benefit of the minor. While there are no statutorily enumerated uses for the account, it is generally understood that these funds should not be used to pay for expenses that would normally be considered parental obligations, such as food, clothing, and shelter. As soon as the beneficiary reaches the age of majority (eighteen or twenty-one depending on the state), the beneficiary is free to do whatever the beneficiary wishes with the money, with no restrictions.

We Are Here to Help

We are living in uncertain times, but we understand that providing for your family is always a priority. Having a plan in place designed for your family’s unique circumstances can provide substantial peace of mind. We are available, via telephone, video conference, or in person, to discuss the options available to you and your family as you navigate the current conditions and plan for your family’s education and financial future.

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