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College Education Trust basics

The cost of a good education continues to rise quickly, nowadays scholarships and grants may not be enough to cover all expenses. A College Education Trust is an easy way for you to set aside funds for your child’s or grandchild's education.


Use the College Education Trust document if:

  • You want to set aside money for someone's education.
  • You want to control how educational money is allocated.
  • You want to avoid gift taxes by not giving the student the money directly.
  • You want estate tax advantages.

A big plus to using a College Educational Trust is that you can control exactly how the funds are to be used. Your terms can be as broad or as specific as you want. Plus, your designated trustee can control the payout of the money, so your beneficiaries do not have direct access to the funds.


Other names for this document:


College Trust Fund, Education Trust Fund


What is an Educational Trust Fund?


An Educational Trust Fund is like other types of trusts with the exception that the funds are designated to be used for education specifically. Basically, a trust is a fund that holds assets (which can be money or property), you set the rules on how and when the funds can be released, and a third-person or entity manages the fund for you. There are tax advantages to putting money into trust funds.

All trusts have three designees:

  • Grantor: In this case, likely you. This is the person that funds the trust and is most often the one setting the terms of the trust.
  • Beneficiary: The person receiving the benefits of the trust. This could be a family member, but it does not have to be.
  • Trustee: The person or entity that oversees managing the trust. You could use a professional service or appoint a trusted friend or relative.

If the trust is to be used while you are alive, it is considered a Living Trust. If it becomes active after you die, it is a Testamentary Trust. If the funds are disbursed while you are alive you might consider limiting how much is paid out to avoid a gift tax. If the funds are transferred after you die, they are not subject to a gift tax. Talk to an estate planning lawyer to understand the best option for you.


What are the parts of a College Education Trust?


Most Education Trust documents include the same sections. You'll want to think about questions like how do you want funds disbursed, what happens if the beneficiary doesn't use the funds, how do you want the trust to terminate, who do you want to manage the trust, and more.

Considerations for making an Education Trust:

Purpose

What is the purpose of the trust? Is it for only funding education, or will it also be used for managing healthcare or general support of the beneficiary?

Funding of the trust

How will the trust be funded? Will a lump sum be added now? Or will you add money through the years? Will your life insurance be used to fund part of the trust?

Trustee

Who will manage the trust? Will you hire a professional service or designate someone you know? Will you have one entity to manage the investing of the money and another to manage distribution? What powers will they have? Are there limitations? If you choose an individual, you will also want to choose a second person should something happen to the first.

Distribution

How will the money be distributed? Will the trustee pay education costs directly to the institutions? Will the trustee only manage the trust until the beneficiaries reach a certain age or until the funds reach a zero balance?

Education

What type of education qualifies for access to the funds? Do you want to limit education to a specific school or type of school? Will trade schools or job training programs be covered as well?

Termination of the trust

Some set a specific age for when the beneficiary can receive the balance of the fund. Often this is set to age 21, 25 or 30. You can also leave instructions for the trust to be transferred to a different beneficiary if the funds are not used by the original beneficiary by a certain age.

Distribution after a certain age

You may decide to control the distribution of funds after a certain age limit is met. For example, you could say until the age of 30 the funds are to be used for education, and after that, they are to receive a monthly or yearly allotment of the remainder (rather than the whole balance at once). Or you can designate that the funds be moved to a different type of trust.

Death of the beneficiary

You can dictate what happens if the beneficiary dies before they receive access to the trust. You may decide to have the beneficiary change, or you could even leave the balance to a charity or institution if you want.

If you need assistance with making your trust, you can ask an estate planning lawyer to review your documents.


Is a 529 Plan a Trust Fund?


No, it is not. 529s are college savings plans that often include tax benefits. 529 Plans vary greatly by location. Most are tied to specific states and schools. Unlike other types of savings plans, funds from 529s can only be used for school expenses. If the tax advantages of your chosen 529 Plan are beneficial, it might be worth your investment. However, keep in mind that your 529 balance is not protected. Funds are often invested in bonds and your balance may fluctuate from time to time. If the funds are not used, they can be transferred to another beneficiary, used for private elementary or high school, or cashed out with a 10 percent tax penalty.


Sample College Education Trust

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College Education Trust basics

A big plus to using a College Educational Trust is that you can control exactly how the funds are to be used. Your terms can be as broad or as specific as you want. Plus, your designated trustee can control the payout of the money, so your beneficiaries do not have direct access to the funds.


Other names for this document:


College Trust Fund, Education Trust Fund


What is an Educational Trust Fund?


An Educational Trust Fund is like other types of trusts with the exception that the funds are designated to be used for education specifically. Basically, a trust is a fund that holds assets (which can be money or property), you set the rules on how and when the funds can be released, and a third-person or entity manages the fund for you. There are tax advantages to putting money into trust funds.

All trusts have three designees:

  • Grantor: In this case, likely you. This is the person that funds the trust and is most often the one setting the terms of the trust.
  • Beneficiary: The person receiving the benefits of the trust. This could be a family member, but it does not have to be.
  • Trustee: The person or entity that oversees managing the trust. You could use a professional service or appoint a trusted friend or relative.

If the trust is to be used while you are alive, it is considered a Living Trust. If it becomes active after you die, it is a Testamentary Trust. If the funds are disbursed while you are alive you might consider limiting how much is paid out to avoid a gift tax. If the funds are transferred after you die, they are not subject to a gift tax. Talk to an estate planning lawyer to understand the best option for you.


What are the parts of a College Education Trust?


Most Education Trust documents include the same sections. You'll want to think about questions like how do you want funds disbursed, what happens if the beneficiary doesn't use the funds, how do you want the trust to terminate, who do you want to manage the trust, and more.

Considerations for making an Education Trust:

Purpose

What is the purpose of the trust? Is it for only funding education, or will it also be used for managing healthcare or general support of the beneficiary?

Funding of the trust

How will the trust be funded? Will a lump sum be added now? Or will you add money through the years? Will your life insurance be used to fund part of the trust?

Trustee

Who will manage the trust? Will you hire a professional service or designate someone you know? Will you have one entity to manage the investing of the money and another to manage distribution? What powers will they have? Are there limitations? If you choose an individual, you will also want to choose a second person should something happen to the first.

Distribution

How will the money be distributed? Will the trustee pay education costs directly to the institutions? Will the trustee only manage the trust until the beneficiaries reach a certain age or until the funds reach a zero balance?

Education

What type of education qualifies for access to the funds? Do you want to limit education to a specific school or type of school? Will trade schools or job training programs be covered as well?

Termination of the trust

Some set a specific age for when the beneficiary can receive the balance of the fund. Often this is set to age 21, 25 or 30. You can also leave instructions for the trust to be transferred to a different beneficiary if the funds are not used by the original beneficiary by a certain age.

Distribution after a certain age

You may decide to control the distribution of funds after a certain age limit is met. For example, you could say until the age of 30 the funds are to be used for education, and after that, they are to receive a monthly or yearly allotment of the remainder (rather than the whole balance at once). Or you can designate that the funds be moved to a different type of trust.

Death of the beneficiary

You can dictate what happens if the beneficiary dies before they receive access to the trust. You may decide to have the beneficiary change, or you could even leave the balance to a charity or institution if you want.

If you need assistance with making your trust, you can ask an estate planning lawyer to review your documents.


Is a 529 Plan a Trust Fund?


No, it is not. 529s are college savings plans that often include tax benefits. 529 Plans vary greatly by location. Most are tied to specific states and schools. Unlike other types of savings plans, funds from 529s can only be used for school expenses. If the tax advantages of your chosen 529 Plan are beneficial, it might be worth your investment. However, keep in mind that your 529 balance is not protected. Funds are often invested in bonds and your balance may fluctuate from time to time. If the funds are not used, they can be transferred to another beneficiary, used for private elementary or high school, or cashed out with a 10 percent tax penalty.

Use the College Education Trust document if:
  • You want to set aside money for someone's education.
  • You want to control how educational money is allocated.
  • You want to avoid gift taxes by not giving the student the money directly.
  • You want estate tax advantages.
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