When you discover that you are the beneficiary of a trust fund, you may have many questions. This is especially true if you are thinking about higher education, as you may want to use this money to pay for your college education. The following blog explores whether or not this is possible and how a trust fund can help cover these expenses. You’ll also discover why it’s vital to have PA trust attorneys ready to help and answer any questions you may have.
What kind of trust can pay for my college education?
In general, there are two standard options those leaving funds for their beneficiaries will opt for. A 529 plan is something many will use to designate funds for their beneficiary’s education. While there are some advantages, many instead choose to create an irrevocable trust, as it is much more flexible.
An irrevocable trust is one that cannot be changed or terminated once it has been created. Upon creation, the grantor can set aside $15,000 a year for five years, amounting to $75,000 per beneficiary. It’s important to note that these funds are invisible to creditors and lawsuits, meaning if the creator of the trust is sued for any reason, these funds will not be impacted. This essentially guarantees that the funds left for you will be yours to use.
What are the benefits of using an irrevocable trust?
In comparison to a 529 plan, an irrevocable trust is a better idea when paying for secondary education. One of the main advantages is that an irrevocable trust is more flexible. A 529 plan can only be used for education, meaning you cannot use the funds to pay for medical expenses if you are sick or injured. However, the money in a trust can be redirected to cover these expenses.
Similarly, funds used in a trust are subject to an annual exclusion, or the amount of money you can transfer to someone without paying a gift tax. As of 2023, the gift tax will impact transfers of $17,000. However, when the trustee – the person named to manage the trust – transfers the money from the fund directly to the institution, it is excluded from the gift tax. This means they can then transfer additional funds directly to you without paying the gift tax.
When you are named the beneficiary of a trust fund, you will likely have many questions. This process can be confusing in some instances, so ensuring you reach out to an experienced estate planning attorney with any questions you may have is vital. At Friedman Schuman, our dedicated legal team is ready to help you navigate this process. Contact us today to learn more about how we can help you use the funds allocated to you to get your degree.