Education Trusts: Another Way to Save
A solid education is arguably the best way to secure your child or grandchild’s future. Education opens the mind as well as doors of opportunity. As an alternative to the 529 plan, you can set up an education trust for your child or grandchild’s education. The funds will not grow tax-free as they do in a 529 plan, but an education trust can be used for a wider variety of purposes. The annual gift tax exclusion allows you to gift up to $15,000 per year to any person. An education trust can allow gifts to qualify for the annual exclusion by granting a 30-day ‘withdrawal right’ after making a gift to the trust. The beneficiary’s guardian would sign a waiver, and the gifted amount remains in the trust. It is important to note that if the gift to the trust qualifies for the annual exclusion, it also reduces the amount you could otherwise gift directly to that child or grandchild in that year. On the other hand, if the gift to the trust does not qualify for the annual exclusion (e.g., no withdrawal right is given), or to the extent the gift is over the annual exclusion amount, then a gift tax return must be filed and your lifetime estate tax exemption (which is now $11.2M) will be reduced by the amount of the gift not covered by the annual exclusion. Likewise, gifts to a trust for the benefit of a grandchild will also reduce your generation skipping transfer tax exemption unless the annual exclusion applies. To address these issues, you should work closely with an attorney and a CPA familiar with trusts and withdrawal rights when making gifts to this type of trust. If you have questions, feel free to give us a shout!