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Estate Planning 101: Education Funding for Children and Grandchildren

In 2021, the average tuition for four-year public colleges increased by 1%, and 2% for private colleges. These price increases reflect a trend that has been growing for years.

Many parents and grandparents dream of the opportunities which higher education can provide for their children and grandchildren. However, the nightmare of massive student debt is an unfortunate reality for many recent graduates in the United States.

Does your current estate plan account for the educational needs of your family?

Below are a few options for those looking to ensure that their estate will be used to further the educational journey of children and grandchildren.

Open a College Savings Account

With recent trends in mind, calculating the average cost of tuition 5, 10, or even 15 years down the line may cause you to stay up at night. And with inflation in mind, there is no better time than the present to begin investing in college savings accounts. Unlike other investment accounts which may have significant minimum funding requirements or restrictions on the timing of additions, funds can be added at any time per your convenience and minimum contributions are often significantly lower than other investment vehicles.

For those interested, we recommend making it a priority to add funds into these savings accounts each time your family comes across a windfall. With each promotion, bonus, inheritance, or gift received from a special occasion involving the child (communions and confirmations, quinceañeras, bar/bat mitzvahs, etc.), consider contributing funds to the college savings account before anything else.

Learn the Difference Between 529 Plans

The most common type of college savings account is a 529 plan, also known as a qualified tuition plan. 529 plans are tax-advantaged programs that allow you to invest your assets into an education fund. While any US resident can open a 529 plan in any state, typically their home state offers unique tax incentives and benefits.

The two types of 529 plans are prepaid tuition plans and savings plans. Prepaid tuition plans—which are state-sponsored and require proof of residency—allow families to pay for the tuition of a specific public college ahead of time, not including room and board.

Education savings plans, on the other hand, allow families to save for tuition, fees, and room and board for any college in the United States, as well as many international universities. Unlike prepaid tuition plans, 529 education savings plans can also help fund tuition for public and private elementary and secondary schools.

Keep in mind that not all state-sponsored 529 savings plans are guaranteed, and most include restrictions, expenses, and fees.

Transferring your Savings Accounts into an Education Trust

The main purpose of an education trust is to ensure that your family members’ education will not be affected should you pass away unexpectedly. An education trust allows the family control over who will be named as beneficiaries, along with how the funds will be used and distributed.

The makeup of a family education trust is also not limited to the funds contributed to your savings account and can hold multiple 529 plans for multiple beneficiaries, along with other assets and investments. Including at least one 529 plan into an educational trust may be an attractive option for many families, as contributions to those savings accounts grow tax-free and are shielded from gift and estate taxes.

An education trust should also consider who you wish to be named legal guardian of your children if they are under the age of 18, as well as any financial trustee, should they be two different people. These are the people who will be responsible for ensuring that your children receive their education funds when tuition comes due.

Discuss Further Options with an Estate Planning Attorney

At first glance, the options available for education funding tools may seem daunting and confusing to many families. An experienced estate planning attorney can help walk you through the decision-making process and answer questions on matters such as taxes, trusts, savings plans, and other options.

Even for young families, there has never been a better time than right now to start thinking about the future. Do not hesitate to reach out to an estate planning attorney to learn more about all the ways you can provide the best and brightest possible education opportunities for your children and grandchildren.

At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best education funding tools for their specific needs and desires. If you have questions about estates and trusts, please contact us at (443) 589-5600.

Related blog posts:

What Estate Planning Documents Should My Child Have When They Turn 18?
Estate Planning Documents For Your College Student 
What You Need to Know About Advance Directives
What Is a Financial Power of Attorney?