Pay for a Loved One’s Education with an Education Trust Fund

Of all the gifts that parents, grandparents, and others may give, the gift of an education may be one of the longest-lasting and most beneficial. An education trust fund allows a person to give money toward another person’s education while ensuring that the funds are used specifically for that purpose. If you would like to set up a trust fund for a loved one’s education, consider contacting an experienced California estate planning attorney at Von Rock Law by calling (866) 720-0195 to discuss your options for setting up the fund.

What Is an Education Trust Fund?

An education trust fund provides funding specifically for educational purposes. The trust can be set up to benefit one person, multiple family members, or a certain group of people, such as scholarship recipients or students attending a particular educational institution. Many people set up these funds to benefit their children, grandchildren, or nieces and nephews. They may also set up a fund for someone they are not related to but have a close relationship with and want to help pay for that person’s education.

With this type of trust fund, the grantor provides money or other property to the trust. The trustee, who may or may not be the grantor, distributes funds to the beneficiaries. The trustee is responsible for ensuring that the beneficiaries are using the funds for the stated purpose. The trustee is also responsible for confirming that the beneficiaries have met any conditions set by the trust for receiving funds, such as attending a specific school or a minimum number of classes per semester.

How Do Education Trust Funds Work?

In many ways, education trust funds are similar to other trust funds. The grantor names a trustee and beneficiary or multiple beneficiaries. The grantor decides whether the trust is operational immediately or becomes operational upon his or her death.

These trusts can be just for a university education. They can also be for community college, medical school, law school, trade school, workshops, travel, retreats, business building courses, and other types of education. The grantor must decide how broad or limited the education requirements will be. The trust can be used to fund various aspects of education, including tuition, books, living expenses, miscellaneous fees, and other expenses.

What Are the Different Types of Educational Trusts?

An education trust fund can be one of two types. A living trust is set up and used while the grantor is still alive. A testamentary trust is created by a provision in the grantor’s will and pays for the loved one’s education after the grantor has died. Additionally, the grantor can set up a “pot” trust, which has multiple beneficiaries whose educations are funded by the trust. This can, however, create problems between beneficiaries who may not all receive the same amounts of money from the trust. To avoid that problem, some grantors choose to create multiple individual trusts so that all the loved ones have their own trusts.

While they are not specifically education trusts, other options include a Section 2503(c) minor’s trust or a Crummey Trust, according to the American Bar Association. A seasoned California estate planning attorney from Von Rock Law may be able to go over the different trust options and help determine which one may work best for your circumstances.

Are Education Trust Funds Taxable?

Educational trusts are taxable and are subject to both California and federal taxes. However, a grantor may be able to set up the trust so that the beneficiary will be responsible for the taxes. If the trust distributes any income to the beneficiary, the beneficiary will be responsible for reporting the amount on state and federal tax returns as taxable income and must pay all taxes due on that income. If the beneficiary is a resident of a state other than California, he or she may want to consult with a tax accountant or attorney to determine whether state income taxes are due to that state.

Important Details to Consider When Setting Up an Education Trust Fund

When setting up an education trust fund, there are several factors to think about before moving forward. While there may be other considerations based on the circumstances, common concerns include the following.

How Funds Will Be Used

The funds are meant to be used for education, but there is a lot of latitude in what that means. Grantors should consider if they want to specify any of the following:

  • What kind of educational institution the beneficiary can attend—university, community college, trade school, medical school, or law school
  • What kind of attendance is appropriate – full-time, part-time, online, etc.;
  • What grade or scores are required – a “B” average, “pass” courses offered on a pass/fail basis, etc.
  • Whether workshops, business building courses, travel, etc. will count as education

What the Funds Will Be Used For

Grantors should also think about what kind of education-related expenses they want the beneficiary to be able to cover with the funds. These may include tuition, books, living expenses, fees, materials like laptops or software programs, or other related expenses.

How Long the Trust Will Last and What Dissolves It

Once the funds in a trust are completely used, the trust will end. However, grantors may want to consider other possibilities as well. The grantor should create terms for how the money in the trust should be handled in any of the following circumstances:

  • What if the beneficiary decides not to complete his or her education?
  • What if the beneficiary becomes incapacitated or passes away?
  • What if there is money left in the trust after the beneficiary has completed his or her education?

What Restrictions the Grantor Wants to Include

Some grantors may want to restrict the trust to specific circumstances. For example, a grantor may want the beneficiary to attend the same school the grantor attended, to maintain a specific grade point average, or to work while attending school. A grantor may also want to restrict a beneficiary’s access to funds based on certain behaviors, such as being suspended or dropping too many classes.

How Much Money the Trust Will Hold

Education trusts tend to be a preferred choice when the value will eventually be $100,000 or more or if there will be more than one beneficiary. If a grantor expects the fund to be smaller or to only have one beneficiary, he or she may find a California 529 plan, as defined by the United States Securities and Exchange Commission, to be more appropriate.

Create an Education Trust Fund for Your Loved One Today

An education trust fund can be a great way to support and provide for a loved one. Because the trust is specifically for education, it can encourage and motivate beneficiaries to further their education. If you are ready to set up a fund for your loved one, consider contacting an experienced San Francisco estate planning attorney from Von Rock Law by calling (866) 720-0195 to schedule a consultation today.

Tell us your story

Schedule your free consultation