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.