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Estate Planning: Educational Trusts Explained

Educational trusts ensure that the money being allocated to a fund can only be used for educational expenses. It is important to structure these trusts properly so that funds are used in a specified manner and at the time they are intended.

When structuring a trust, you must specify the terms designating elements like how, when and by who the fund will be used. The following information from the attorneys at Snee, Lutche, Helmlinger & Spielberger gives you an overview of what to you should consider when creating an educational trust.

When will the trust become operational?

There are two classifications that outline when a trust becomes operational: a living trust, and a testamentary trust. When structuring an educational trust, you must consider the time frame in which the funds will be needed. A testamentary trust becomes operational when the grantor (you) dies. This type of trust should only be used if the beneficiary is young; if you are close to the end of your life; or if you are sure the funds will not be needed in the near future. By classifying a trust as testamentary, the grantor has more time to fund the trust, and may avoid resulting gift taxes.

A living trust is best when the funds may be needed sooner rather than later.  This type of trust takes effect immediately, but also requires funding right away. The grantor has the ability to fund the trust in increments of their choosing, but needs to be aware of any monetary gift that exceeds the annual exemption amount.

Who will Be chosen as trustee of the fund?

A trustee has the sole authority to control the trust when it goes into effect. This entails disbursing the money within the fund according to the specified terms. In an educational trust specifically, the trustee will use the money within the trust to pay for the education of the beneficiary. This person should be someone that you are confident in, and that you trust to have the best interest of the beneficiary in mind when making decisions. Common choices for trustees are a spouse, the parent of the beneficiary, a sibling, an adult child or lawyer. Keep in mind that you will also need to name an alternate successor in the event that the initial trustee cannot satisfy their role.

In living trusts, it is common for the grantor to name themselves as the original trustee. In that case, you will simply need to designate a successor who can replace you when you pass away. If you choose to create a testamentary trust, then you will need to assign the role to another individual that you can rely on, in addition to choosing an alternate.

How many individuals will be beneficiaries of the trust?

If the intent of the trust is to support the education of various individuals, you can either create separate trusts, or name multiple beneficiaries to one. If undertaking the latter, you must explicitly state how the money within the trust is to be allocated.

If you have full confidence in the ability of your trustee to decide the division of funds, you can create a pot trust—merging all funds together with no stated guidelines of division. This option creates the most flexibility, especially when the needs of each beneficiary are different and undetermined at the time the trust is created. However, this can create hardship and tension amongst beneficiaries who feel their needs are not being met.

What form of education is supported by the trust?

If you have specific wishes on the acceptable form of education for which the trust can be used, then you must define them upon creation. For example, if you would prefer that the trust be used for a bachelor’s degree program, rather than an associates or technical degree, then you must explicitly state this in the terms. The simplest way to set up an educational trust, however, is to be accepting of all forms of education when defining the terms. Either way, it is vital that you clearly state your intended purpose for the trust, in terms of education, so that your trustee has clear guidance in how they can distribute funds when that time comes.

What happens upon trust expiration?

If structured properly, a trust will likely expire when all funds are distributed, and/or your beneficiary has completed their education. However, in the event that other situations arise, you need to consider a contingency plan.

You will want to specify what happens with the money in the trust if the assigned beneficiary never goes to school; if there are excess funds after their education is complete; or if the beneficiary, or one of the beneficiaries, passes away.

You can structure the terms of the trust so that, in the event of any of these situations, the money is distributed in a different manner. For example, you can specify that regardless of educational achievement or need, any money left in the trust should become the property of the beneficiary when they reach a certain age.

Where should you start?

There are many various factors to consider when structuring an educational trust, so it is important to be informed of the process and to enlist the help of an experienced attorney. The attorneys at Snee, Lutche, Helmlinger & Spielberger are well equipped to guide you through the process and structure of an educational trust. Contact us today for more information.

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Bel Air, Maryland 21014

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