You are thinking about leaving something to the grandkids when you are gone. Or, you don’t have any children of your own and want to leave an inheritance to your nieces and nephews or great nieces and great nephews.
However, you’ve been thinking about it. You have decided not to just leave them a financial windfall. You have read time and time again about the actor, professional athlete or lottery winner who had millions, and now is destitute. You have valued higher education and you want to give your loved ones something of lasting value.
You have investigated 529 plans. They will meet your basic goal of providing education expenses. However, you are stuck with whatever rules that the plan sponsors have put in place and what the IRS allows.
You do not want to just leave them cash to pay educational expenses. How do you know they will not just spend the money on more pressing “needs”? These young adults are not minors anymore. When they become adults at age 18, they miraculously gain all the insight and wisdom of adulthood. You do not want them going to the University of Corvette.
One option that we regularly have used for grandparents, aunts and uncles in this situation is an educational trust. This type of trust can be set up as a sub-trust in your revocable living trust, that only takes effect after your death.
What type of provisions can you have in this educational sub-trust? Anything you want, so long as it is not illegal, immoral or against public policy. We just have to figure out how to say it. We have drafted a number of educational trusts over the years. The most popular for grandparents, aunts and uncles is the reimbursement educational trust.
We have seen many times and you have probably heard about situations in which the student either fails a course or disenrolls. If a student fails a course, all the tuition and other expenses are forfeited. When a student disenrolls after the bills are paid but before the course drop-add period expires, the student oftentimes can get a cash refund of all tuition and expenses, to be spent on something more important to the student than college.
You can put a provision in your educational trust, that it will not pay upfront expenses, but will only reimburse the student after he or she completes a course with a C or better and continues to be enrolled in or completes a course of study, at the discretion of the trustee. This encourages two things.
Firstly, the student has to work to find financing for his or her education. By making the trust discretionary and not allowing the student to demand reimbursement, this type of educational trust is generally not considered an available resource for financial aid purposes.
Secondly, by working hard and passing all of his or her courses, the student can get reimbursed for college expenses and graduate debt-free.
Typically, the reimbursements are not made directly to the student. So long as the student is enrolled in a course of study, the reimbursement is made directly to the university or college for the next semester’s course of study, or directly to pay off student loans. Only after graduation and all student loans are paid off, would any excess reimbursement be paid directly to the student.
I had one client’s trust that reimbursed tuition and expenses only during enrollment. Only after the student graduated, did the trust reimburse room and board, usually to pay off student loans. If the student never graduated, room and board were never reimbursed.
By setting up an educational trust for higher education, you can benefit your loved ones with a gift that can last their lifetimes.
By: Matthew M. Wallace, CPA, JD
Published edited July-August, 2013 in Savvy magazine as: A trust: Option for education expenses