Education Trust Fund: What is it & How to Set it Up
Estate planning without educational fund considerations is rare. One of the main reasons that you plan your estate is to ensure that the future needs of your loved ones are provided for upon your death. And access to education is the most basic need of many beneficiaries, especially minor children.
Even if you are not a parent or your children have already finished their education, you may still want to support the education of your grandchildren, nephews, nieces, and other beloved young beneficiaries. This post will provide the necessary information on setting up educational trusts, an essential tool in planning for the future educational expenses of your children and other beneficiaries.
What is an Education Trust Fund?
An education trust fund is a type of trust where the trustor (the trust creator or grantor) establishes a fund for the sole purpose of providing educational support for the beneficiary. The trustor transfers their money and other properties to fund the trust. Next, the trustor assigns a trustee to control and manage these properties according to the terms of the trust.
The trustor can be a person, a group of two or more people, or a charitable institution. Similarly, the beneficiary can be a single individual, a set of siblings, a group of scholarship recipients, or an educational institution. An education trust fund is also called a college trust fund because it is often created to pay for the college tuition and expenses of the beneficiary.
Additionally, an educational trust fund can be an incentive trust which means that the trustor can set up objective criteria that influence the distribution of the trust fund. These criteria encourage the beneficiary to achieve educational goals like getting high grades or discourage them from negative behavior such as failing classes.
Education Trusts vs. 529 Plans
An educational trust fund and a 529 plan both aim to provide for the future educational needs of your child. An education trust fund, however, provides the following advantages over a 529 plan:
Reduce Future Estate Taxes
An educational trust fund provides estate-tax reduction by allowing you to make qualified and tax-exempt transfers to the beneficiary’s educational institution. This is on top of the annual tax exclusion gifts (up to $15,000). In 529 plans, any amount above the annual $15,000 will be subject to estate tax.
Flexibility
There is limited flexibility in managing the funds under the 529 plans. An education trust fund provides flexibility in fund investment and distribution. The trustee has more varied options of investment vehicles for the trust fund. Also, the trustee can distribute the funds to beneficiaries for other purposes aside from education costs, as long as the purposes are within the terms of the trust.
Protection
The money, properties, and other assets remain under the education trust fund even after the beneficiary finishes their education. Thus, the fund is protected from misspending, debt, divorce, and other eventualities. You can rest assured that the education trust fund you created, as long as the trust is properly managed, will remain intact to provide support to your beneficiaries even after they finish their education. Any life insurance benefits or other interest from family wealth transfer vehicles can also be incorporated into the educational trust fund, providing additional protection to your beneficiary.
How to Set Up an Education Trust Fund
1. Evaluate Your Objectives
There is no one-size-fits-all trust. Every family has unique dynamics, special situations, asset profiles, and goals. You must consider all of these before drawing up the trust terms. Be specific in setting up your purpose and objectives for your beneficiary’s education to ensure the effectiveness of the trust.
2. Establish the Funding Process
The basis of a trust’s validity is the sources of its funds. In this step, you must clarify and provide details on the assets that will be held under the trust. You may need to identify which assets to hold, invest, or distribute when necessary.
3. Assign the Trustee
Assigning the trustee is easily the most critical step in the process of setting up an education trust fund. The trustee will oversee the management and distribution of the trust. When living, the trustor is generally the trustee, but they must assign the trustee who will succeed them upon their death. The successor trustee you assign must be trustworthy and knowledgeable, or experienced in these types of roles.
4. File Trust Documents
The next step is the legal creation of the trust. This is done by working with an experienced trust attorney to create the trust documents and file them through the necessary process. We suggest that you do not handle this with your general practice law firm, and instead with an attorney experienced in trust creation. This is to ensure that every important consideration is included in the terms before you legally create your trust. A trust and estate planning law firm will have vital legal advice based on their experience and expertise.
5. Transfer Your Assets to Fund the Trust
Once created, you can now transfer the assets that will fund the trust. Some assets like real estate deeds may need to be re-titled to reflect the trust as the owner. Life insurance policies, personal accounts, and investment certificates may also need to be transferred from the personal owner to the trust. Otherwise, these assets are not officially owned by the trust and won’t be subject to its protection and other benefits.
Secure Your Loved Ones' Future Education with Rilus Law
As with any estate planning strategy, educational trust funds are only useful when done right. Even with the best intentions, these tools can fail without the proper care and attention to detail when setting them up. You can take the shortcut and save your money by skipping professional advice, but you may end up paying more in the future through asset losses, trust fees, taxes, and, worse, failure to carry out your wish to protect your loved ones.
Here at Rilus Law, we are all for providing the necessary information for your estate planning needs. However, we are limited to providing only general information in most of our posts. For your specific questions and clarifications, schedule a free consultation today.