Trust Matters
Irrevocable Education Trusts vs. 529 Plans
What is an Irrevocable Education Trust?
A quality education is one of the greatest gifts anyone can give to a child. To make that possible, many families have turned to 529 plans, which offer attractive benefits including tax-free growth, state tax-deductible contributions (depending on your state), and the flexibility to change beneficiaries. BUT – for those concerned about estate taxes, there may be another alternative for financing educational expenses — Irrevocable Education Trusts.
An Irrevocable Education Trust is specifically designed to pay for education expenses. This type of trust typically requires that trust assets must be disbursed only towards the Beneficiary’s tuition and any expenses directly related to their education such as, but not limited to, the following examples: books, supplies and equipment; special needs services if the Beneficiary has Special Needs; room and board; the purchase of computer equipment, software, or internet access and related services. Effort is required to structure the trust, so the rules are followed, and funds are readily available for only the authorized education expenses. Any amount the Trustee does not distribute for the benefit of the Beneficiary shall be accumulated and added to the principal of the Trust.
What are the Advantages of an Irrevocable Education Trust?
- An Irrevocable Education Trust establishes an immediate ownership interest for the beneficiary, which also removes the funds from the Donor’s estate.
- Assets can remain in the trust after the Beneficiary finishes their education thereby protecting funds from creditors, divorce, and reckless spending.
- The Grantor (funder) is assured that an inheritance will be sheltered for a useful purpose instead of being used wastefully.
- Trust assets can be invested in a wide array of vehicles, whereas 529 plans offer limited options.
- At such time when the Beneficiary attains a specified age, the remaining Trust assets can be distributed to the Beneficiary, outright and free of trust.
- Irrevocable Education Trusts can hold a beneficiary’s interest in other family wealth transfer vehicles, including life insurance.
Given the complicated nature of estate planning, RCFS recommends that you consult with us and our experienced team of in-house professionals, your (or RCFS) legal counsel, and your (or RCFS) trusted financial advisors, who can help you evaluate the benefits and drawbacks of each option, including the legal and tax differences involved with Irrevocable Educational Trusts. •
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