If you want to form a trust to pay for the educational expenses of a loved one, you have many options available. Education trusts are useful for making direct payments to educational institutions, and they could also be used to directly support your budding student during their important years of learning.
Many states, including New Mexico, also offer a 529 education savings plan that can provide similar benefits, albeit with many more limitations. However, these savings plan options do possess many tax advantages, so it can be worth it to consider all of your options, including a combination of a trust and a 529 plan.
You can even use a trust to directly fund one or multiple 529 education savings plans, which can significantly reduce taxes on trust income.
Speak to an Albuquerque education trust lawyer to learn more about your options and start the process of setting up a trust for your loved ones. Call New Mexico Financial & Family Law today at (505) 503-1637 or contact us online to schedule a no-obligation consultation today.
Trusts can be an ideal mechanism for estate planning. They can also be a great way to set aside money for one or multiple loved ones to pay for college, trade school, private K-12, or a number of other possibilities.
When done with an eye towards the future, an education trust can even benefit multiple generations — long after you are gone. However, the tax considerations of this arrangement can be substantial unless the right planning and strategy are used.
An Albuquerque education trust attorney can work closely with you to learn more about your goals and the opportunities presented by your unique financial portfolio. They may recommend a single trust, multiple trusts, or a combination of a trust and 529 education savings plans, depending on the situation you face and the options available.
Read on to learn more about some of the educational trust and savings options you could consider. Then, reach out to one of our Albuquerque education trust attorneys to learn more about how a unique investment and gifting vehicle can provide the exact benefits you seek.
One of the biggest strengths of an Albuquerque education trust is that, compared to many specialized trusts, it has no particular set of rules it needs to follow. Grantors are relatively free to make any choices they want in how the trust is structured.
This strength can also be seen as a bit of a drawback, however, because there is not a single tax-advantaged way to use a trust to donate money to a loved one’s educational expenses. Unlike a charitable trust, for example, there are not clear-cut tax benefits to reap.
Instead, the grantor is left to make their own decisions, including how to make the best financial arrangements to reduce the taxes generated through growth in the trust’s assets.
Overall, the flexibility of an Albuquerque should be seen as an asset. To explain how forming one could benefit the next generation of scholars in your family, first, it would help to describe how trusts work, generally:
Grantors have the option to decide if they want to create their educational trust during their lifetime — referred to as creating a “living trust” or “inter vivos trust.”
Alternatively, they could wait until the time of their death to fund the trust. This type of trust is usually created in a provision of the grantor’s will, which is why it is referred to as a “testamentary trust.” In this case, the trust will be funded with assets from the decedent’s estate.
Usually, if the grantor had already created a living trust, they would use some assets from their estate to make additional contributions to the testamentary trust upon their death.
Unlike some types of special-purpose trusts, there are no rules for who the grantor of an Albuquerque education trust can appoint as trustee. For some families, it may make the most sense for the grantor to serve as trustee of a living trust during their lifetime.
Then, the duties of trustee would fall on someone else after their death.
Another option is to name a parent of a beneficiary as a trustee.
However, it can also make a lot of sense to name a neutral, non-interested party (or a company, like a bank) to serve as trustee. When this approach is used, the beneficiary will often have less motivation — and less leverage — to pressure the trustee to release funds for a non-educational purpose.
In these cases, the trustee is often given a wide degree of discretion over how to use the trust. For example, they may agree to cover certain expenses while declining coverage of others.
The trustee is also responsible for “cutting the check” for distributions from the educational trust. Since the goal is to ensure that the money in the trust goes to an education-related expense that the grantor would have approved of, then it makes sense for the trustee to “control the purse strings” and avoid releasing funds directly to the beneficiary, except for in rare instances.
Forming a revocable trust gives you the power to make substantial changes to it or dissolve it while you are still alive. You could change the trustee or radically alter the trust’s terms.
You could even take back (i.e., revoke) the assets used to fund the trust in the first place. This arrangement can provide substantial peace of mind, since the trust can be reverted at any moment, with only the setup costs as a casualty.
Grantors also have the option to create an irrevocable trust. Many choose to do so when the goal is to fund education expenses. One primary reason is that it can remove their influence — as well as the beneficiary’s.
If a neutral trustee is given broad discretionary powers, it makes sense to also remove the grantor’s ability to fire them and simply take all their money back. In addition, creating an irrevocable trust could allow you to combine other benefits with the trust’s educational purpose.
For example, you could create a charitable lead trust that lists a 529 plan used to fund the student as one of its beneficiaries. While this arrangement could only provide funds up to the 529 plan’s limits, it does provide tax reduction advantages.
You could also use the education trust as a domestic asset protection trust. In this case, the trust would need to be formed in another state, as New Mexico provides limited statutory asset protections for irrevocable trusts compared to other states.
But once it was formed, the educational trust could not only pay for certain expenses but also shield assets from creditor claims.
Note that all trusts become irrevocable at the time of the grantor’s death.
For expenses where the trustee doesn’t directly pay a service provider — such as when they give an allowance to the student — the trustee can be guided by the terms of the trust.
For instance, the trust could allow the student to claim a certain amount of money for their own personal expenses each month, provided that they maintain a GPA above 3.0. The beneficiary may also be required to graduate college with a Bachelor’s degree within 4-6 years, or else they risk losing the rest of the money in the fund.
Alternatively, grantors can include provisions to ensure the money in the trust eventually finds its way to the student, even if they don’t graduate like they had originally planned. Many education-oriented trusts, for example, go ahead and turn over the beneficiary’s total interest to them once they turn 30, so they are able to decide for themselves how they want to spend the money.
With this arrangement, there is no risk that the trust funds could go to an unintended party.
If the grantor chooses to create the trust during their lifetime, they have two options available, regardless of whether the trust is revocable or irrevocable:
Most grantors will choose the first option, if the trust is created during their lifetime. This arrangement typically results in lower taxes, since trusts have smaller tax brackets and, therefore, can be more easily taxed at the highest possible rate.
Once the grantor is deceased, the trust automatically becomes a non-grantor trust.
Technically, beneficiaries are supposed to pay taxes on any distributions they receive from the trust, as if they had earned the income (or capital gains) themselves. However, if trust contributions are used to directly pay for tuition, healthcare, or other expenses, these payments do not count as direct gifts or income given to the beneficiary.
As a result, these payments would also avoid generation-skipping transfer taxes.
A 529 education savings plan is a tax-advantaged account that can be set up for the benefit of a single person. Some key characteristics for our state’s version of the plan include:
Anyone can donate to a 529 education savings plan, including a trust. In addition, anyone can be the designated account manager of a 529 plan, including a trustee.
While these plans are limited in the total amount of funds they can hold, there’s no limit on how many different plans you can have — provided they are located in different states. Usually, individual states consider all 529 plans created for a single beneficiary in that state as one account, even if they technically have different investment amounts and account owners.
However, states don’t necessarily track whether the beneficiary has accounts located in other states.
Because of these advantages, families might want to consider incorporating a 529 education savings plan in their education trust structure, even if it ends up being just a small part of their overall strategy.
New Mexico Financial & Family Law understands the value education has in this world. New generations have the potential to make so many positive changes happen, and knowledge is often their key to unlocking new experiences — as well as opportunities to excel.
With many options for an Albuquerque trust at your disposal and really no limit to the level of customization they can bring, the sky is practically the limit for the future generations you want to support. You could even establish a dynasty trust that contributes to educational expenses or 529 savings plans in multiple states for multiple generations to come.
The key is planning ahead, knowing what you want to achieve, and committing to the right strategy for bringing about the future you want to see.
Get started by scheduling your no-obligation consultation when you call our Albuquerque education trust law firm at (505) 503-1637 or contact us online.
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