What is the Purpose of an Education Trust?
An education trust is an estate document that allows the owner of the estate and creator of the trust to specify that beneficiaries must use the inheritance for education only, whether it be college, university, or trade school. The grantor can also stipulate the type of distributions and other guidelines. Paying for a loved one’s education with a trust fund is a unique and lasting endowment. It also provides the freedom to choose one generation of heirs, or they can finance the education of future generations for years to come.
Education Trust Funds Offer Family Security
An education trust is a legal entity an individual or family can establish to hold assets to benefit children, grandchildren, and future generations. Costly education expenses place a substantial burden on young adults and their parents. Families can establish an educational trust fund to contribute property or funds for beneficiaries to use towards the cost of education. The grantor may choose to set up the trust to benefit a single beneficiary’s education, or they may select a group of recipients. Education trust funds are a flexible way to invest in the education of beneficiaries, even after the individual passes away.
What are the Benefits of an Education Trust?
The trusts provide many benefits that other educational savings plans do not offer. Education trusts not only benefit the heirs, but they also provide many advantages for the grantors. Some of the most significant benefits of these effective estate planning documents include the following:
- Creating education trust funds guarantees the assets will be available when the time comes to pay for your loved ones’ education in the future.
- The trust creator of the education trust fund leaves a lasting and memorable legacy.
- The grantor has control over how and when the heirs spend the inheritance.
- The education trust fund safeguards the assets from disputes by separating the property and money from the grantor’s private and business investments.
The trusts allow grantors to rest assured knowing their assets are going to a good cause and their beneficiaries have the means to further their education.
How an Education Trust Funds Works
Parents or grandparents often create education trusts for children in the family during their lifetime and begin making periodic contributions. After the grantor funds the trust, the beneficiaries can start taking trust distributions when needed to pay for educational costs. The way the family or individual sets the trust up will be the determining factor in how it operates.
Creating the Education Trust Fund
The estate creator can set up the education trust much like a living trust document. That means the legal instrument is operational while the grantor is alive and can remain in effect after death. According to the guidance of the Texas Property Code § 112.051, the grantor has the legal authority to modify or terminate a revocable trust at any time if they choose. If the creator decides to set up an irrevocable education trust, they cannot change any terms of the trust as it is permanent. The first may sound like an easy choice. However, because the trust is for educational purposes, the latter may provide additional tax benefits and other advantages that the revocable trust does not. There are many essential decisions the grantor must make during the drafting and creation process, and those include the following:
- The type of trust documents, including living, testamentary, revocable, or irrevocable trusts
- Decisions regarding the trustee designation, they may choose one trustee or several if they wish
- The beneficiaries receive the money for their education
- When and how do they plan to fund the trust
- Disbursement wishes and guidelines
For questions concerning preparing an education trust fund or help to draft the documents, please consider visiting an experienced estate planning attorney. They could review and answer specific questions and help guide families through the education trust planning process.
The Education Trust Fund Gift Tax Advantage
For those with a large estate, and depending on the type of education trust fund they set up, the trust could make them eligible to receive federal estate tax benefits. Additionally, the trust creator and beneficiaries could also qualify for a gift tax exclusion. According to the Internal Revenue Service, most property with monetary value that an individual gives to someone else is subject to a gift tax. However, there is an exception for paying another person’s school tuition or other educational expenses for gifting purposes. There is an educational exclusion in most cases. The interest and dividends the trust fund’s assets generate could also qualify for the exclusion.
Creating an Education Trust Fund Legacy to Live on for Generations
One of the top priorities for most estate planners is leaving a legacy for their loved ones and future generations. Creating an education trust fund for beneficiaries allows you to leave an incredible legacy to your children, grandchildren, or for many generations to come. An education trust can be a valuable tool to pass assets on to your heirs and help them reach their educational goals and give them a gift they will always remember. It would allow you to set specific guidelines on spending the money to protect them from making poor choices they may regret while also giving them an irreplaceable gift.