While college education has been seen as not only a rite of passage but also necessary in order to enter into many areas of workforce, the costs associated with it can be overwhelming. In recent years, the costs associated with higher education have come with a hefty price tag and are projected to continue to rise over the next few decades. According to The College Board, in 2017, the average cost for tuition, fees, and room and board for a four-year private college is a whopping $118,000. If the college-cost inflation rate is 3 percent, today’s 8-year-old can expect to pay $265,000 for four years of higher education at a private college in 2028. With the costs of college looming for current and future generations, more grandparents are looking to support their grandchild’s higher education expenses in their estate plans.
There are several estate planning options for grandparents to take advantage of when looking to support a grandchild’s pursuit of higher education.
NJBEST 529 College Savings Plan
A 529 plan is a tax-advantaged plan that allows an individual to save for a designated beneficiary’s future education costs. The withdrawals from the plan can be used for tuition, fees, school supplies, computers, books, and other necessities for college as long as the beneficiary is enrolled at least half-time. The account owner maintains control of the assets in the account, including how and when the assets are used. Account owners have the ability to change the beneficiary to another member of their immediate or extended family.
New Jersey’s plan, also known as NJBEST 529 College Savings Plan, can be opened with as little as $25. It allows an individual to contribute up to $305,000 per beneficiary over the lifetime of the account.
The drawback with 529 Plans is that they charge a fee for the management of underlying mutual funds. In addition, some plans, including NJBEST, also charge a program management fee as well. According to NJ.com, the costs for these fees are between .04 and 1.07 percent depending on the mutual fund(s) chosen.
While there are many trust options available, not all trusts allow contributions to qualify as annual exclusion gifts. To qualify for an annual gift tax exclusion, the beneficiary must receive present interest.
Section 2503(b) Minor’s Trust
A Section 2503(b) Minor’s Trust requires income to be distributed to the child at least once a year. The income can be distributed to a custodial bank account. The income is taxable to the beneficiary. The benefit of this trust is that it does not terminate once the beneficiary reaches the age of 21 years old. The trust can last up to the lifetime of the beneficiary or longer if the trust’s creator desires. If the trust meets requirements, contributions to this trust qualify for the gift tax exclusion.
Section 2503(c) Minor’s Trust
A Section 2503(c) Minor’s Trust allows all the assets within the trust, as well as the income, to be used for the child until he or she reaches the age of 21. The trustee can use the trust’s principal to pay for a beneficiary’s college expenses. As long as the trust meets requirements, contributions to this trust qualify as annual exclusion gifts.
When the beneficiary turns 21 years old, the assets remaining in the trust must be turned over to him or her. Before the trust is created, the individual must consider whether or not the beneficiary will be mature enough to handle the trust’s assets responsibly once he or she reaches 21. If the beneficiary passes away before he or she reaches 21 years old, the assets in the trust will be included in his or her estate.
The Crummey Trust does not require annual distribution of income annually or the distribution of the principal once the beneficiary reaches 21 years old. Many trust contributions are considered taxable gifts. With a Crummey Trust, each time the trust’s creator distributes assets, he or she must give the beneficiary a window of time, typically 30 to 60 days, to withdraw the funds. If the beneficiary is provided with this window of time and is informed of their right to withdraw the funds, the gift will be considered present interest and, therefore, excluded from the annual gift tax.
Estate planning for your loved one’s college expenses can be difficult to navigate. For those looking to fund the expenses of a grandchild’s higher education through their estate plan, it is recommended that they seek the guidance of an experienced New Jersey estate planning lawyer. The estate planning lawyers at Hunziker Jones & Sweeney are experienced in all aspects of estate planning, including the establishment of trusts for minor grandchildren. For more information or to schedule a consultation with our New Jersey estate planning lawyers, call our Wayne, New Jersey law office at (973) 256-0456.