Your Estate Plan and the Gift of Education
Article published in Northampton Living
(November 2023)
EXPERT CONTRIBUTOR
Claire Crowley & Ben Palkowski
Estate Planning Attorneys
Old Colony Law
413 387 0080
oldcolonylaw.com
The Pioneer Valley, home to the Five Colleges, could be branded “Education Valley” because its history and values are deeply rooted in the pursuit of knowledge.
When our clients desire to fund education for their children and grandchildren, here are some legal techniques we deploy:
Trusts
Creating a trust to fund education-related costs on a loved one’s behalf can help them avoid the need for burdensome student loans.
In order to fund education for a beneficiary while limiting their access to an entire inheritance, you may restrict disbursements to those solely for educational purposes. Suppose you are concerned about your loved one’s lack of maturity in handling money. You may limit trust distributions and restrict remaining funds until the child is of a certain age.
What if your loved one wants to pursue education via a non-traditional route, like a vocational program, yoga teacher training or culinary school? When you capture your wishes in a trust, you get to define what education means.
And if your beneficiary is so young that it’s too soon to forecast their ambitions? You can still establish trust distribution parameters and appoint a trustee (a family member or professional) to make disbursements in accordance with your wishes.
Direct Tuition Payments
You don’t need to wait until death to help finance a loved one’s education. You may provide this support during your lifetime – and even avoid certain taxes while doing so.
Federal law imposes a tax on gifts in excess of $17,000 (adjusted annually for inflation) from one individual to another. Tuition payments made directly to higher education institutions on another’s behalf are excluded from the annual threshold. One caveat: In order to avoid gift tax ramifications, the payment must be for tuition; payments for books, meals, and room and board are not eligible for this exclusion.
Section 529 Savings Accounts
A Section 529 savings account is a vehicle for saving for a child’s higher education costs.
Contributions to these accounts constitute gifts under the tax code and are subject to the aforementioned gift tax threshold. However, a donor may “frontload” a 529 by electing to use 5 years’ worth of the annual gifting threshold. Therefore, donors may contribute up to $85,000 ($17,000 x 5), and married couples can join forces to double their gifting power to $170,000 to initially fund a 529.
Another benefit of 529s is that the donor retains absolute control over the distributions, even though the initial contributions are legally considered gifts. And income earned on the investment accumulates tax-free.
Thanks to recent reforms to federal tax law, 529s may also be used to fund tuition at elementary and secondary schools, including private and religious institutions.
However you elect to do so, providing for the gift of education in your estate plan will present a lifetime of opportunity for your beneficiaries.
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