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The United States Department of Agriculture estimates that the cost of educating a child born in 2009, through college, will be more that $286,000 after inflation. For parents hoping to provide even a portion of what their children will need to earn a bachelor's degree, there are several types of trust funds and education savings plans available that will not only help them fund their children's education, but also provide certain tax advantages.


An education trust is legal arrangement in which property, cash, stocks or bonds are given by a grantor and held by an appointed trustee for the benefit of someone else. The trustee manages the trust and distributes the property or funds to the beneficiary according to the instructions of the grantor. The trustee of an education trust will distribute those funds to pay college, private or parochial school tuition and expenses as specified by the grantor.

Advantages of an Education Trust:

  • Control – the grantor controls the use of the funds and how they are spent by the beneficiary, thus, in the case of the educational trust, ensuring that the funds will only be used toward the education of the beneficiary. The beneficiary, usually a child, has little or no direct access to the proceeds of the trust, usually until he or she reaches a certain age. Also, with a trust fund, you are not limited as to what qualifies as an “educational” expense when withdrawing funds, so long as you specify such expense is allowed in the trust document. You can, for instance, pay your child's car note while he is in school if you wish.
  • Tax Advantages – assets in the trust are not part of a grantor's estate and therefore not taxed or assessed fees at the grantor's death. Taxes on property and cash, that are under the umbrella of the trust, may be taxed at a lesser rate than the remainder of the estate if designated for educational purposes.
  • Ease of Establishment – Anyone can set up an education trust, whether a relative or not, so long as you hold some interest in the child's education. An education trust can be comprised of cash or property or a combination of both to be used to benefit the child in the future.
  • Estate Protection – An educational trust fund protects the cash or property in the fund and specifies it be used for what you want it to be used – in this case the child's education. By adding conditions as to how the proceeds of the estate are to be distribute, you can insure the portion of your estate included in the trust are used as you wish them to be, even after you are gone. Trustees hold a fiduciary responsibility to the child who is beneficiary of the trust fund and is obliged, under law, to administer the trust in accordance with the terms of the trust document and applicable laws. If the trust is set up as an irrevocable trust, the funds become property of the trust fund and may not be used for any purpose other than the purpose outlined in the trust document and may not revert back to the grantor.

Types of Educational Trusts:

  • Living Trust – A living trust is created during the lifetime of the benefactor, parent or relative. Living trust have the advantage of helping the benefactor avoid probate, of saving rime and money in the cost of setting up the trust and of insuring privacy since living trusts are confidential documents.
  • Testamentary Trust – A testamentary trust is established as one of the provisions of a last will and testament. The same probate costs, legal fees and taxes apply to an educational trust provision of a will that apply to wills in general.

The so-called Crummey Trust, named for the first family to establish this type of trust fund, allows parents to place large amounts of money in a tightly controlled trust account. It can be specifically for education or may include other things. It may be a living or testamentary trust. The Crummey Trust allows parents to protect the money and property set aside in the trust fund from misuse, even after they are dead. The terms of the trust not allow the child access to the money until they are significantly older than the usual 18 or 21.

Trust have significant setup costs and upkeep and may be taxed at higher levels than education savings plans. In general, unless the amount you wish to set in trust for your child's education exceeds $100,000, an education savings plan will probably be more attractive and offer greater tax savings. These types of trusts may be established in addition to more attractive savings plans that have been maxed out for parents who wish to put additional money aside for their children's education.

Education Savings Plans

Do not confuse education trusts with education savings plans. These plans are generally for smaller amounts and subject to strict requirements under federal and state tax codes. Unlike trust funds educational savings plans and accounts belong to the contributor until the funds are distributed to the student. These savings plans include:

  • 529 Education Savings Plan – The 529 education savings plan offered by most states allows parents to prepay a student's qualified education expenses. Contributions are not deductible on your 1040, but 34 states do offer a deduction on your state tax bill for a 529. You may contribute up to $250,000 at once to the plan and anyone can contribute to a 529, no matter their income. You have a limited selection of investments you can select with a 529. The money may only be spent on higher education. The funds are tax-free when withdrawn by the student so long as it's used to pay for books, tuition, supplies, computers, technology related to the student's education or room and board. A 529 is treated as a parental income contribution, when it comes to calculating financial aid and can save you some cash at registration.
  • Coverdell Education Savings Accounts – A Coverdell ESA is a custodial account set up while the beneficiary is still under 18 or has special needs. It must be set up specifically as a Coverdell ESA and a document creating and governing the account must be written up. A Coverdell ESA is limited to an annual contribution by the benefactor of no more than $2000 and the contribution is not deductible. Like a 529, the student may receive tax-free distributions from the fund to pay qualified education expenses. The number of investment choices are greater with a Coverdell ESA and the account may be used to pay for elementary and high school tuition.

Tips With Trusts:

  1. Choose wisely – Make sure you choose the trustee for the account well. It should be someone you trust implicitly. A law firm may act as trustee if you wish, but there will be fees for this service. Remember, the trustee will be in charge of deciding whether the funds are distributed the way you want them to be. A poor decision by a trustee can have devastating tax consequences for your trust fund.
  2. Consult a tax accountant and lawyer – Education trust funds require complex paperwork and the devil is definitely in the details. There may be taxes, either state or federal on the earnings of the fund and there may be legal remedies to help you avoid some or all taxes depending on your circumstances. Taxes may even be passed through to your child to be taxed at the lower child rate if properly set up. A trust is too complicated to set up properly without professional help.
  3. Be careful with irrevocable trusts: Obviously they are irrevocable and you cannot take back the money or assets, but in addition, you will need to answer certain questions. What impact will there be on the trust if you or your spouse die? What will happen to the assets covered by the trust if your child dies or decides not to go to college or flunks out? When will the balance, if any, go to the beneficiary child after he or she completes or drops out of college? All these questions and more have to be answered in the trust document.


Legal Zoom: Leaving Money for College – Education Trusts

Dugan & Lopatka: College Planning, Education Trusts

Rocket Lawyer: Free College Education Trust

Education: Saving for College in Trust Accounts – Paying Tax on Your Trust Tax Topics – Tax Benefits for Education Center