You and your clients have undoubtedly seen the projections about college expenses. Using an average increase of 5% per year, by 2030 the annual tuition at a four year public school could soar to $41,200, and $92,800 at a private, nonprofit school.  

These numbers will undoubtedly make even the well-to-do cringe. Thus, parents and grandparents are often interested in strategies to sock away money now to pay for skyrocketing college expenses.  

Advisors who understand the various tools used to save for college – one of the biggest concerns for clients everywhere – will add significant value to their relationships. So, rather than an exploration of Coverdell or UGMA/UTMA accounts that you’ve all heard about before, this newsletter explores a few trust-based options that can help differentiate your practice and help your clients.  

A Revocable Educational Trust

While revocable living trusts are commonly associated as the centerpiece of a client’s estate plan, a “special purpose” educational revocable trust can provide significant flexibility to clients looking to set aside funds for a child’s or grandchild’s education, but who perhaps aren’t quite ready, for whatever reason, to make a permanent gift or earmarking of the assets.

A revocable education trust puts your clients in control (the trust is revocable after all) and lets them focus on the goal of legacy for their family rather than on the complexities associated with managing irrevocable trusts. While alive and well, your clients can serve as the trustee and have complete discretion about the timing and purpose of distributions, letting them tailor distributions to their family’s needs.

For example, Bob and Jane set up a trust for their grandson Nick. They add Nick as a permissible beneficiary and add assets each year to the trust without any gift tax consequences (because the trust is revocable, there’s no completed gift). If they choose to do so, they can share with Nick how much has been set aside, or they can choose to keep it private. If Nick doesn’t need the assets (say because of a scholarship or because he’s chosen to not pursue higher education), the assets aren’t trapped inside of an education-specific account, such as a 529 plan, and Bob and Jane can give them to Nick or use them for some other purpose by revoking or restating the trust. To that end, this type of trust can help Bob and Jane feel more comfortable about setting aside money, since they can still gain access to the assets if they need to, which can be challenging, costly, or impossible as a practical matter with some of the other options, like UTMA/UGMA, 529 plans, or irrevocable trusts.

Planning Tip: While clients are still alive, this trust will be a grantor trust for federal income tax purposes, so consider income tax efficient investing strategies and a coordination of the investment strategy in this trust with the client’s overall investment strategy.

Demand Trusts – A “Crummey” Way to Save for College and Other Expenses

While “Crummey Trusts” are commonly used to own life insurance and won’t be fully funded until after death, they can also be used as an effective lifetime gifting trust to hold funds that can be used to pay for a beneficiary’s expenses. A properly drafted “Crummey Trust” will include demand rights that allow transfers made to it to qualify as annual exclusion gifts and remove the trust assets from the trustmaker’s estate.

Planning Tip:  A Demand “Crummey” Trust is a flexible tool for setting aside funds to provide for the care, support and education of a child or grandchild since the parent or grandparent gets to choose exactly when and how funds will be distributed and for what purpose.

529 Plans – State-Sponsored Pre-Paid Tuition Plans and Savings Plans

States can choose to implement one or both of the two types of “529 Plans”:  

1.    Pre-paid Tuition Plans – Tuition rates are guaranteed to remain at current levels; and

2.    College Savings Plans – These are essentially state-sponsored mutual funds.

How 529 Plans work:

  • Contributions must be made in cash and must qualify for the annual gift tax and GST tax exclusions.
  • Each beneficiary must have a separate account.  
  • Earnings grow tax-free and distributions are tax-exempt when used for higher education expenses, including tuition, fees, books, supplies, equipment, and room and board.  
  • If a beneficiary decides not to go to college or fails to finish, the donor can change the beneficiary to another family member of the same generation without any gift tax or GST tax consequences.
  • A 529 account can be owned by a trust, providing continuity of management for trust assets (even those not used for higher educational purposes) and the possibility of greater control by your clients, although this removes the ability to pre-fund the account (more below) and may result in the loss of a state income tax deduction.

Planning Tip: A non-trust-owned 529 account can be “supercharged” by funding it with up to five years of annual exclusion gifts in one year (currently $14,000 per beneficiary, or $70,000). Thus, a married couple with three grandchildren can set aside $420,000 in one year (2 x 3 x $70,000). On the downside, if the donor dies before the fifth year after funding, the gifts for the years following the year of death will be brought back into the donor’s estate. When deciding whether to fund a 529 account, you and your clients should consider whether the advantages of trust ownership outweigh the negatives. We’re here to help answer any questions you or your clients may have about trust-owned and non-trust-owned 529 accounts.

Warning – College Savings Vehicles May Impact the Availability of Financial Aid

Clients need to understand the impact a revocable educational trust, a 529 Plan, a UGMA or UTMA account, or Demand “Crummey” Trust will have on financial aid. In general, a student’s assets are given greater weight than the parent’s assets, so techniques that shift assets from a parent to the student may reduce needs-based financial aid.

One significant potential advantage of a revocable educational trust created by a grandparent is that it probably doesn’t need to be disclosed as an asset for financial aid purposes, so long as it is revocable by the grandparents and the rights to the assets are entirely dependent on the discretion of the grandparents.

As part of the educational planning process, let’s proactively work together to ensure that we’re considering all angles and recommending the best solution given the client’s circumstances.

Call On Us for Guidance

Identifying what will be the best college-saving tools for a particular client will depend on many factors, including their earnings, savings, income tax bracket, risk tolerance, their age, the ages of their children or grandchildren, and the potential for scholarships and other financial aid. Call us to discuss the various scenarios; we’re always available to help you and your clients.

How to Protect Your Heirs and Your Legacy from Bad Decisions and Outside Influences

Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn't as hard as you might think. - Suze Orman

After working diligently for decades to achieve your financial goals, you understandably want to preserve your gains and leave an enduring legacy to the next generation. For better or for worse, though, your heirs have free will. Even while you’re alive and very much capable of directly communicating with your children, favored charities and others, you might already be uncomfortably familiar with the limits of your influence.

As you contemplate the future, it’s easy to ponder disagreeable scenarios. What if your adult child squanders the business you leave her by getting involved with a dubious partner or burning through cash reserves and taking speculative risks? What if the non-profit that you co-founded mismanages the property that you leave it or runs afoul of legal issues?

Your carefully outlined plans for passing money onto the next generation can be derailed in many ways:

  • A widowed spouse remarries unwisely;
  • An unanticipated or unforeseen tax consequence drains the estate;
  • A chronic illness or lengthy nursing home stay disrupts the plan;
  • An aggressive creditor, fraud, financial mismanagement, or some other unfortunate act undoes your hard work and creates a complicated, expensive, dramatic mess for your family.

In this month’s newsletter, we will explore a solution to the problem of how to best pass along your financial legacy, so that you can breathe easier and feel more comfortable with your options.

The good news is that you’re not the first to deal with this anxiety. For centuries, wealthy people have wrestled with how to protect and exert control over the next generation. As a result, they and their advisors have developed quite a toolbox.

This “insider secret of the wealthy” we are about to discuss is strategic as well as tactical. But before we dive in, I want to share what is the more common planning option. In many estate plans, inheritances are given to heirs staggered (such as one-third at age 25, one-third at age 30, and the rest at age 35) or outright with no strings attached. This approach seems straightforward and therefore sensible. But, staggered or outright distributions are less than ideal because they leave your heirs’ inheritance vulnerable to interference from creditors, predators, and courts.  

So what can and should be done, instead?

Here’s one powerful answer: Leave an inheritance in a discretionary lifetime trust, rather than outright or staggered.

What is a discretionary trust?

Depending on how it’s implemented in your circumstances, this type of trust lets you pass assets along to beneficiaries now or at your death. As the name implies, you give the trustee discretion over how and when the beneficiaries may access trust assets. Certain uses of the money might be deemed acceptable, whereas other uses will be restricted.


For instance, if your daughter wants to go to medical school, or your son wants seed money to launch a business, then the money is available. However, if your child (or other beneficiary) veers off path or violates the terms and conditions you incorporate into the trust, then the assets are not available. With proper planning and a good choice of trustee, the funds you set aside can last for your beneficiaries’ whole lives and beyond.  

How Does This Tool Shield an Inheritance?

First of all, the discretionary lifetime trust cordons off the inheritance. A vengeful ex-spouse, plotting business partner, unshakeable creditor, or plaintiff in a lawsuit against your beneficiary will have a very hard time breaking down the wall surrounding the property and assets you’ve left. Of course, no wall is impenetrable, but this one can be made quite strong.

The trustee has the power to go inside this wall, according to your explicit and pre-determined wishes, and access the funds. But the “bad guys” are generally kept at bay.

You can also ensure that whatever is “left-over” in the trust after a beneficiary dies goes to where you want. You could stipulate that what’s left should be passed to a grandchild, a sibling, or a cherished organization. In this way, you can develop a series of discretionary lifetime trusts and ensure your legacy for decades or longer. This also lets you enshrine your standards and values by imposing them as conditions on the benefits.

You can also empower the trustee to proactively help beneficiaries. For instance, if the trustee notices that your son (sadly) has become an alcoholic or inveterate gambler who cannot be trusted with an allowance, she can be given the discretion to deny or limit the flow of benefits to him and instead use trust funds on his behalf (say to directly pay rehabilitation, rent, or other expenses).

Of course, there are numerous other benefits to discretionary trusts, ranging from estate and income tax planning to proactively passing along financial values.

Although a long-utilized and popular tool for the wealthy, this type of trust has helped protect countless people across the entire wealth spectrum, from the modest to the well-to-do. In many cases, it can help your family too.

You probably have many questions about lifetime discretionary trusts. We’re here to help. Please call us today, so we can explore how we can help you and your family.

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.