ESTATE PLANNING BRIEF
Providing for the educational needs of your children, grandchildren, and future generations is an honorable estate planning objective. What are your options for achieving this goal? A 529 plan can be a highly effective tool for funding tuition and other educational expenses on a tax-advantaged basis. But after your death, there’s no guarantee that subsequent plan owners will continue to use it to fulfill your original vision. An alternative strategy is to create a family education trust that invests in one or more 529 plans.
529 plan flexibility
529 plans are state-sponsored investment accounts that permit parents, grandparents, or other family members to make substantial cash contributions. Contributions are nondeductible, but the funds grow tax-free, and earnings may be withdrawn tax-free for federal income tax purposes (plus state tax breaks in some cases) provided they’re used for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, equipment, and some room and board at most accredited colleges, universities, and vocational schools.
529 plans offer owners a great deal of flexibility. For example, depending on a plan’s terms, owners have control over the timing of distributions, can change beneficiaries, and can roll the funds over into another state’s plan tax-free. It’s even possible to recover funds that won’t be used for education expenses (subject to taxes and, in most cases, a 10% penalty).
In addition to the risk that a subsequent owner will use the funds for noneducational purposes, the disadvantages of 529 plans include relatively limited investment choices and an inability to invest assets other than cash.
Transfer a 529 plan to a trust
Establishing a family education trust to hold one or more 529 plans provides several benefits. For example, it permits you to maintain tax-advantaged education funds indefinitely (depending on applicable state law) to benefit future generations, and it keeps the funds out of the hands of those who would use them for other purposes.
In addition, the trust allows you to establish guidelines on which family members are eligible for educational assistance and direct how the funds will be used or distributed in the event they’re no longer needed for educational purposes. You can also appoint trustees and successor trustees to oversee the trust.
Finally, the trust can use funds outside 529 plans for purposes other than education, such as paying medical or nonqualified living expenses.
Turn to the professionals
Leaving an educational legacy for your loved ones and future heirs requires considerable planning but can be incredibly fulfilling for you and beneficial for your family. We can provide guidance in creating a family education trust.
Contact us for additional information on the role of an education trust.
This newsletter is for general information and education purposes only.
It is not offered as legal advice or legal opinion.
To the extent this message contains tax advice, the U.S. Treasury Department requires us to inform you that any advice in this letter is not intended or written by our firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Advice from our firm relating to Federal tax matters may not be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer.