An educational trust is established usually by a grandparent, parent, or other relative for the future education of a child. The person creating the trust, called the grantor or settlor, transfers a certain amount of money, securities or other income producing assets into the trust for the benefit of the child.
The grantor can provide instructions in the terms of the trust agreement regarding what conditions should exist for the trustee to make distributions for the child's benefit.
- Distributions for room, board, tuition, and books at college, university, or other vocational schools
- Support and maintenance expenses before college
- Transportation expenses - (automobile and car insurance)
- Net income distributions after graduation from college
- Principal distributions at certain times (graduation, one-half at 25th birthday, one half at 30th birthday)
- Distribution instructions can also include guidance to the trustee on when distributions should cease (failure to attend college, failure to make satisfactory progress towards the attainment of a degree, failure to maintain full-time enrollment)
- Distributions for educational purposes can be for vocational training and not necessarily limited to college or university classes
- Distributions of principal can also cover the down payment on the purchase of a home if the trust funds are large enough
- How the financial distributions should be made when the trust terminates should be listed in detail in the terms of the trust
- Most grantors of this type of trust make it irrevocable in order to keep the transfers of the assets into the trust out of their estate for tax purposes
- Under these conditions, someone other than the grantor should be the trustee
Future Gifts and Additional Beneficiaries
- A grantor of an irrevocable educational trust can continue to make gifts in future years into the trust account and therefore take advantage of both the annual gift exclusion of $15,000. If both grandparents created the trust for their grandchildren, they could jointly give $30,000 of cash or assets each year to each grandchild
- If more grandchildren are born after the creation of the trust, the terms can provide a formula by which the trustee divides the assets on the books thereby creating a new and separate trust for each beneficiary. One trust agreement, however, can control all of the separate accounts. This separation protects each child from the distribution needs of the other children
- These types of trusts are often used by parents after a divorce when the grantor is not the custodial parent of the children. It provides the parent, who will be paying for the future education, the safeguard of the trustee being in control of the distributions, not the custodial parent (who may have remarried)
- These types of trusts can be used for the "support, maintenance, and welfare" expenses of a minor child prior to reaching 18 years of age, as well as their college educational expenses thereafter. These trusts are commonly created in the settlement of lawsuits dealing with injury claims of the parents or children
- If the trust funds are large enough and the trust is to continue well past the college education of the beneficiaries, the terms of the agreement can also provide other instructions to the trustee on principal distributions. For example, can a certain amount of money be distributed to help the beneficiary establish or buy a business? Is the trust fund to provide a transportation vehicle? Can money be taken from the trust and used as a down payment on a home?
- Medical emergencies allowing invasion of the principal should be considered
- Educational trusts like these have several tax advantages and can assist the grantor in the completion of his or her overall estate plan. Consult your CPA, as well as your attorney, when considering the creation of this type of trust
Choosing the Trustee
- It is very important to thoroughly consider who should be appointed as trustee of this type of trust. It is best to choose a trustee with experience in managing educational trusts for young beneficiaries and who is properly equipped to maintain the records on numerous grandchildren's accounts, each with differing distribution needs
- Choose a trustee who has the professional expertise to invest the trust funds properly while awaiting the distributions for the child
- Choose a trustee who is properly audited and will provide the necessary accountings to the grantor and/or parent of the beneficiary
- Choose a trustee who will not be unduly pressured by family members
- Choose a trustee who will follow the legal requirements and distribution limitations specified in the trust agreement
Not a deposit; not FDIC insured; not guaranteed by any federal government agency; not guaranteed by the bank; and may go down in value.