The cost of a college education continues to increase at a dramatic rate. A child born this year and who plans on attending a traditional four-year residential college can expect to pay $48,000 for a public university and $96,000 for a private university every year. With such high costs to consider, many parents begin their college savings plans as soon as a child is born.
One of the most common types of college payments plans is a Section 529 Plan. 529 plans come in two forms, a savings plan and a prepaid tuition plan. In New York, the state runs a savings plan, which allows each plan beneficiary to save up to $375,000 for college. 529 plans come with distinct advantages and disadvantages to both the donors and beneficiaries.
529 plans allow funds to grow on a tax-deferred basis and if the funds are used for qualified expenditures, they can be withdrawn tax-free. In addition, because the donor controls the funds, a beneficiary cannot directly access the funds inside a 529 plan. And while each individual beneficiary must have his or her own account, if one child fails use the entire account for qualified expenditures, it can be transferred to another child.
For those looking to fund education expenses, a 529 plan is not a suitable investment vehicle. Expenditures that do not qualify as college expenses are subject to a penalty upon withdrawal. Furthermore, 529 plans offer a limited selection of investment options to choose from. And while a beneficiary cannot access the funds in a 529 plan, a donor’s control over the plan’s investment strategy is limited as well.
As an alternative to a 529 plan, parents and grandparents looking to save for their children and grandchildren’s education may wish to consider a Crummey Trust for Education. Named after a case in which a parent created a trust for the benefit of his children, this type of trust is established to take advantage of the annual gift tax exclusion. Each year, property is contributed to the trust up to the annual exclusion amount ($13,000 for an individual; $26,000 for a married couple). For a short period of time, the beneficiaries are given the right to access the funds. This allows the property to qualify as a present interest gift and be excluded from any gift tax.
When compared to a 529 plan, a Crummey Trust has several key advantages. First, a Crummey Trust may invest in any type of investments allowed by its trust instrument. This is helpful for donors looking to fund education expenses using nontraditional investments such as real estate. Second, unlike a 529 plan, a Crummey Trust may distribute funds for education expenses prior to college. Third, a Crummey Trust can have multiple beneficiaries and use the collective assets more effectively than multiple 529 plans.
Crummey Trusts have certain disadvantages as compared to a 529 plan. First, a beneficiary may access the funds after the reach eighteen years of age. Second, a Crummey Trust does not receive the favorable capital gains treatment that assets in a 529 plan receive. Finally, as with any trust, there is an additional expense to setting up and administering the trust.
Finding the right vehicle to pay for your child’s education is as important as finding the right school for them to attend. But regardless of what type of planning you choose, starting your planning when your children are young will reap significant benefits to them when they are ready to attend college.
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