An educational trust fund a trust established with the sole purpose of providing funding for education. The fund is established by a person or people depositing a sum of money into a trust, where it is managed by a third party called a trustee for the specified educational purpose. It can take the form of a fund benefiting a single individual, or it can be a charitable holding benefiting a group of people such as scholarship recipients, or an educational institution.
The person or group establishing the educational trust fund is commonly called the grantor, donor or settlor. They provide the money or other assets, and stipulate the purpose money will be used for and any other conditions that must be met in order to use the money. The individual, group, or school that will be receiving money from the trust fund is called the beneficiary. The grantor appoints a person or people for the job of trustee, who oversees the trust fund.
The trustee of the educational trust fund has several important responsibilities. It is his or her job to manage the trust fund, considering the best interests of the beneficiary while still ensuring that the wishes of the grantor are fulfilled. Some of the trustee's duties can include investing the money for the best possible return, managing other assets, making payments to the beneficiary, and making sure that all requirements set by the grantor for the fund's use are fulfilled.
When established for single individual, an educational trust fund is usually formed with parents, grandparents, other relatives, or friends as the grantor. The beneficiary is usually a minor child. The trust fund is managed on the child's behalf by the trustee, and money can not be withdrawn from the trust fund until the child reaches a specified age, most often 18 years old. Once the beneficiary is of age, the money may be used to pay for college, graduate school, trade school, or other educational programs. Expenses paid by the trust depend on the grantors stipulations, but typically can include tuition, books, fees, and even living expenses.
When formed for charitable purposes, an educational trust fund most often benefits a group of people or an educational institution such as a college. Frequently these trusts are managed by groups of trustees and may be funded by many donors or a single grantor. Some purposes for this type of trust include giving scholarships to students who meet specific criteria set by the grantor, or providing educational materials such as books and computers to disadvantaged students. Another example would be building or improving school facilities in order to provide a better educational experience for students.
How To Set Up An Education Trust Fund
It is important not to set up an education trust fund without knowing the answers to a few key questions. First, you need to clearly define who your beneficiaries are. This could be one person or multiple people.
If you want multiple beneficiaries to be able to use the trust, such as if you have several grandchildren that you want to help put through college, you need to clearly define whether this will be done through the implementation of multiple trusts or through a shared trust. While there are advantages to having a shared trust, sometimes called a pot trust, it can potentially create conflict among beneficiaries if they feel they aren't getting a fair share of the funds compared to others in the trust.
Constraints on the Trust Fund
You need to set constraints on how the fund is going to be used from the start so that there is no confusion between the beneficiaries and the trustee about how the money can be used. While you already know that you want the money to be used for the education of the beneficiaries, it is helpful to define exactly what that means. If you are OK with the funds being used for schooling other than traditional university education, it is important to make that clear. Some of your beneficiaries may wish to use the money to get certified in a trade or take another route besides a four-year degree.
It is also important to decide how long the trust fund will last and what will lead to its dissolving. Consider where the money will go if the beneficiaries never use it or if some funds are left over after they are done with their education. There are many ways to personalize the agreement and set the terms in a way that works for your situation; however, planning is essential to avoiding conflict down the road.
Are Education Trust Funds Taxable?
One reason to set up an education trust instead of simply sending money to the beneficiaries to use for their education is that there can be tax benefits in using a trust. While taxes still need to be paid on the money in the trust fund, they are mostly paid when money is put in, minimizing the amount that has to be paid when the beneficiary uses the funds.
Since money put in a trust fund is no longer considered a part of the granter's estate, it is also protected should financial issues occur down the road. For example, if the granter gets divorced and loses some assets, the trust fund is still not able to be removed or used by anyone except the beneficiaries.
Costs of a Trust Fund
There are a few costs associated with setting up a trust fund to be aware of. First are any fees or costs involved with getting the proper legal consultation to help you set up the documentation. This is worth the money, as it ensures that the fund will be used properly.
You also need to consider the taxes on money being put in. This is usually where the majority of tax is paid in a trust fund. Stay under the annual limits of investing in the fund if possible to avoid extra fees.
How To Get Funds for Educational Trust
Education trusts are best utilized if you wish to put aside a large amount of money towards education. The general rule is to use them for contributions that will eventually have a value of $100,000 or more. This doesn't mean you should put all of this money into the trust at once; in fact, doing so may cause you to ultimately have to pay more in taxes. Instead, start saving early if you can, and build up the savings over time.
Other Ways to Save for Education
If you are planning on using the same trust for multiple beneficiaries, you need to plan accordingly. If you only have one person who you want the funds to go to or if you are not planning on investing such a substantial amount of money, you may want to consider other options.
One alternative route to take is a 529 plan, which offers benefits for people investing towards the education of younger family members. Different options for investing in education come with their own pros and cons. Take your time not only to look into educational trust funds but to explore other options as well.