Learn More About Educational Trusts

Many times, parents or grandparents of school-age children in Texas decide that they would like to create a Trust to accumulate money to help pay for educational costs for their minor children or grandchildren. Such trusts can provide benefits to both the adults creating them and also to the children for whose benefit they are created.

An Educational Trust is usually created during the lifetime of a parent or grandparent of a minor child. Essentially, the terms of the trust provide that contributions to the trust can be made periodically, and then distributions can be made from the trust to pay for educational costs for either college, graduate school, or even private schools for elementary or secondary education.

The parents and grandparents contributing to these trusts typically share the concern over whether any gift taxes may be owed as a result of the transfer. Additionally, they typically have concerns about whether the money could potentially be attacked by creditors of either the parent or grandparent or of the minor child if he accrues debts after turning 18.

Gift Tax Advantage

Each individual in the United States has the ability to give away up to $12,000 per year to as many individuals as they choose without incurring any gift taxes. (The Gift Tax is a tax on the transfer of wealth from one person to another during the life of the person making the gift). Educational trusts can be established using those annual gift tax exclusion amounts, which means that the gifts to the Trust can be made without incurring gift taxes. Likewise, the interest and dividends generated on the trust assets after the gift is made are also exempt from gift taxes.

In order for the Education Trust to qualify for the gift tax exemption provision, the trust must be a Crummey Trust.

Liability Protection

Parents and grandparents giving money to their minor children in an educational trust are often concerned that neither the parent/grandparent’s creditors nor the future creditors of the children have the ability to attack the money in the trust and receive payment for non-educational debts out of the trust.

If the educational trust includes Spendthrift provisions (discussed in more detail elsewhere on this site), then creditors are unable to receive payment out of the trust. Even in the situation where a creditor were to sue the trustee or trust beneficiary for a debt, they still would not be able to recover from the Trust for debts unrelated to the purposes of the trust.

Coordination With The Estate Plan

An Educational Trust should be incorporated as part of the overall Estate Plan of the individual(s) creating the trust. For instance, making gifts to an educational trust when children are very small not only removes the money contributed to the trust, but it also removes any interest, dividends, or appreciation generated off of the contributed money from the estates of the individuals creating the trust. For individuals having sizable estates, such a move can help pass a larger amount of assets to future generations of their families without incurring estate or gift taxes as a result of the transfer.

For example, if Grandfather places $10,000.00 into an Educational Trust on the first birthday of his Grandson and by the time Grandson turns 18 and starts college, the original $10,000 gift grows to become $50,000.00, the entire $50,000.00 is exempt from being included as part of Grandfather’s estate. Upon his death, he will have passed $50,000.00 to Grandson without paying estate or gift taxes, and that money will not be included as part of Grandfather’s estate and subject to tax at his death.

An Educational Trust has numerous benefits. At its core, however, the Educational Trust is a great way to provide educational opportunities to children who might not otherwise have them. It also provides parents and grandparents with some peace of mind in knowing that the children may not be able to lose the money by incurring unrelated debts. For more information on how to arrange an Educational Trust for your family, call 713-352-0937.