By Sarah Stewart Legal Group
When planning to help fund family members’ educations, you must be clear on your goals and purposes. Though setting up educational funding can be a simple process, your goals will determine what planning documents you should use.
Although a Will is an option to leave money to your loved ones, you cannot restrict the use of those funds in the same way you can with a trust. So, if your goal is educational funding, you will want to focus on using trusts and other planning options.
(1) Pot Trusts
If you only want to have one trust with more than one beneficiary, a pot trust is an option. The trust is set up so your beneficiaries can request money from the trust for certain, predetermined reasons, such as education.
The problem with this kind of trust is that beneficiaries can end up receiving unequal amounts of money from the trust. For instance, one beneficiary may go to a state school and receive scholarships for education, while another may go to a private school without any scholarships.
Though it may not be your intent, the beneficiary receiving the private school education, without help from scholarships, would receive far more money from the trust than the state school beneficiary.
Another important factor can be age gaps between beneficiaries. If the age gap is great enough, the youngest beneficiary may not have any money left from the trust to fund his or her education.
If equality among beneficiaries is not your greatest goal, a pot trust could be a good option for you.
But, if equality is a goal, another option is Separate Trusts for your intended beneficiaries.
(2) Separate Trusts
The benefit of using separate trusts for each beneficiary is the equality you can establish. Each trust for each beneficiary can receive the exact same amount of money, to be used as you instruct. Of course, you could allot different amounts for each trust if you have reasons to do that as well.
The downfall of separate trusts is your private school student from the example above may not have all the money he or she needs to be able to fund his or her education fully. Separate trusts are better if your goal is equal treatment. If your goal is fully funding educational endeavors, a pot trust may be a better fit.
(3) State 529 Plans
More than 30 states in the U.S. offer tax incentives for establishing 529 education savings plans in their states. Some states even offer incentives for establishing a 529 plan in any state.
State 529 plans allow you to place money into an investment account for a beneficiary. These plans will not allow you to restrict fund usage as much as you may like, but they are geared toward education and have flexibility regarding changing beneficiaries and the kinds of education for which the funds can be used.
If you want to fund your loved ones’ educations, you will need to plan to reach your goals. Reach out to experienced professionals to help you decide what planning options best fit your situation.