Education Trust - It's Never Too Early

             As the expenses associated with a college education continue to increase, parents are seeking ways of setting aside sufficient assets to fund such an education for their children. One such avenue is an education trust.  These can be established early in a child's life, or even in anticipation of the "arrival" of a child or children, and, as to any assets used to fund such a trust, there is no estate or gift tax "cost".  Also, this funding does not erode the unified credit which is presently at $600,000.  These tax results do require the use of Crummey powers.  Such a trust generally is not of a large enough dollar value to lend itself to cost efficient administration by a corporate trustee (many require a substantial minimum asset value for their trusts, in any event).  A competent and trusted friend with professional experience may serve as trustee, and a properly drawn trust document can make its administration quite uncomplicated, and thus inexpensive. Family members should not serve as trustees, in order to protect the tax results mentioned herein.

             Frequently, both the parents and grandparents of a child will contribute to the trust in order to provide a sufficient resource from which the children and grandchildren can pursue both college and graduate  studies.  Such contributions do not have to be fixed in amount or timing, but may fluctuate according to the resources available in a given year.  The important aspect is that some annual contribution be made each and every year until the objectives are achieved.   

            The assets contributed to such a trust can be of varying type, not limited to cash.  For example, the trust can purchase a life insurance policy with an equity building feature.  The advantage is that the equity feature could provide a  substantial balance within the policy which could be  utilized for the payment of education costs.  More obvious is that, if  the insured should die before the child matriculates to college, then the death benefit of the policy would be payable to the trustee of the education trust and be available for the payment of education expenses.  An additional advantage is that the premiums may be fixed for a set number of years so that these payments can incorporated into overall financial planning on an annual basis.  For a younger couple there is an additional advantage due to the fact that the premium payments can be tailored so that they are lower for a term certain, and then later they will increase.  Of course, the equity build up would not be maximized if a lower premium payment schedule were adopted.  With a "universal life" policy, however, there is often available such a high degree of flexibility that the premium level may be adjusted upward or downward (or even suspended for a time) so as to meet specific circumstances.

            For a parent, grandparent, or other person trying to provide for a child's education, a tax-deferred annuity may be of significant help. This means investing for at least seven years in order to gain the tax-deferral advantage AND to avoid "surrender charges".  This device, however, can create a fund which grows over a 20-year period up to 28% more (after tax) than a currently taxed investment with the same yield.

            Some parents use their state's Uniform Gift to Minor's Act in planning for projected education costs. While this approach is simple and straight forward, there are several disadvantages to it.  First and foremost is that these Acts impose very rigid limitations on the nature of assets to be held.  Also, most, if not all, states require that any assets held pursuant to a Uniform Gift to Minor's Act be distributed at a certain age (usually 18 or 21). This mandatory distribution age does not permit the funds to be held for the further costs of an undergraduate or graduate education, and, in general, deprives the creator of the trust of any flexibility.  This approach may even create an incentive for the student to drop out of college, e.g., and move in some other, possibly undesirable, direction.  For these reasons, an education trust is generally a far better vehicle for saving for education expenses. 

            WHAT IS MOST IMPORTANT: (1)A SUSTAINED COMMITMENT TO SAVING (at which we Americans are notoriously bad) and (2) consultation with your professional advisors, accountant (CPA), attorney, financial planner and or life insurance agent (CLU).

            If you are interested in discussing the benefits and mechanics of an education trust, please feel free to call us.

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