Setting money aside for your children’s or grandchildren’s education is a great way to provide for their future. However, it is possible that not all of the money you have set aside will be used for college expenses. For example, your child may receive a large scholarship and will not need to use all the money you have saved, or your grandchild may choose a trade school that is less costly than you expected. Alternatively, your child or grandchild may decide to join the workforce immediately upon graduation. When confronted with this scenario, you may wonder what you can do with the excess money. The answer depends on how the money is managed.
Trusts Created by You
Health education exclusion trust. The purpose of a health education exclusion trust is to provide for the education and medical needs of multiple beneficiaries over more than one generation (typically grandchildren and great-grandchildren), and if money is left over because one beneficiary did not need all of it, it will not affect the operation of the trust. For example, a different beneficiary may decide to go to medical school and thus utilize the perceived excess.
Irrevocable gifting trust. If you work with an experienced estate planning attorney when creating an irrevocable gifting trust,your attorney can help you include instructions for how the trustee should handle the remaining funds if the beneficiaries do not need them. You are free to include instructions in the trust document that allow the beneficiary to use the remaining funds to purchase a house, start a business, or save as a nest egg for retirement. Alternatively, you could name a different beneficiary (e.g., a family member, friend, or charity) to receive the remaining amount.
Revocable living trust. Similarly, if you choose to add a provision to your existing revocable living trust to provide for the education expenses of your child or grandchild upon your death, you can include instructions for what will happen to the remaining money if the entire amount is not needed. Additionally, with a revocable trust, you can change your mind and draft additional contingencies into your plan until your death or incapacity.
Revocable education trust. Like a revocable living trust, a revocable education trust can also be changed up until your death or incapacity. Because the funds held by the trust will likely be distributed during your lifetime, you can amend or revoke the trust if your or the beneficiary’s life circumstances change. You can add or remove beneficiaries, transfer money to or withdraw money from the trust, or create a different set of criteria for making distributions to the beneficiaries.
Accounts Created by Statute
Accounts established pursuant to a state’s Uniform Transfers to Minors Act or Uniform Gifts to Minors Act are set up to hold money and property on behalf of a minor. They impose no education-specific requirements for use of the money, and the only generally understood prohibition is that the money should not be used for expenses that are normally deemed to be parental obligations (e.g., food, clothing, shelter, etc.). Once the minor reaches the age of majority (eighteen or twenty-one depending on the state), the money is turned over to the owner to use freely. If the minor passes away with funds remaining in the account, it will be distributed according to the state’s intestate statute.
State or Federal Education Plans
Internal Revenue Service Publication 970 sets forth similar regulations regarding 529 plans andCoverdell education savings accounts (ESAs). The money held in 529 plans and Coverdell ESAs can be rolled over from one account to another of the same type, and the designated beneficiary on the account can be changed to a member of the beneficiary’s family. A rollover can be for the benefit of the same beneficiary or another member of the beneficiary’s family (e.g., a spouse, child, stepchild, sibling, parent, etc.) who is under age thirty. However, the age limitation does not apply if the new beneficiary is a special-needs beneficiary.
While there are no federal tax consequences for rolling over an account, it is important to check with your tax advisor regarding the state income tax consequences if you received state tax breaks for your prior contributions and are now rolling the account over to an account in a different state. If there is no one likely to use the funds for qualified education expenses, the funds can be withdrawn and used for nonqualified expenses; however, they will be subject to income tax on the investment earnings as well as a 10 percent penalty.
We Are Here to Help
There are many different options for funding your family’s education future, and what happens to any unused funds largely depends on which option you choose. We are here to assist you and your financial team in choosing the best strategy for your unique situation to ensure that your wishes are carried out. Please call us today to schedule a virtual or in-person meeting.