With students returning to school for the fall semester, many remain uncertain whether they will be attending their classes in person or learning online. If you are the parent of a college student, one thing is certain regardless of how your child will be learning during the pandemic, higher education is still going to be costly. This is why it is crucial to start creating a flexible plan for potential expenses that meets your unique needs.
Coverdell Education Savings Accounts
If you invest funds in a Coverdell education savings account, the money can only be used for “qualified education expenses.” These expenses can be incurred at eligible postsecondary schools as well as eligible elementary or secondary schools.
For elementary and secondary education, qualified education expenses include:
- Tuition and fees
- School supplies
- Room and board, uniforms, and transportation are also qualified education expenses if the school requires or offers them
For postsecondary schools, tuition and fees, books, supplies, and equipment are deemed qualified education expenses. Additionally, room and board may be considered education expenses if the student is enrolled at least half-time at the institution.
Computers and internet access are also considered qualified expenses for students at all grade levels if they are primarily used by the beneficiary. The beneficiary’s family can also use these items if the student attends elementary school or a secondary institution. Additional expenses for software that is not predominantly educational is not covered.
A 529 plan, sometimes referred to as a qualified tuition program, requires that the funds be used for qualified education expenses to avoid paying income tax and a 10% penalty. 529 plans that are used to save for elementary and secondary institutions can only be used to pay for up to $10,000 intuition.
Like a Coverdell education savings account, tuition and fees, books, supplies, and equipment are considered education expenses for postsecondary education at an eligible institution. Room and board can also be considered an education expense if the student is enrolled at least half-time.
If you want payments on the beneficiary’s behalf from a health and education exclusion trust (HEET) to be excluded from gift and generation-skipping transfer taxes under Internal Revenue Code Sections 2503(e)(2)(A) and 2611(b)(1), the funds will have to be paid directly to the educational organization for tuition.
Qualified education expenses with a HEET include tuition for any grade level, from preschool to postgraduate, for part-time or full-time students. However, room and board, books, and other related expenses are not considered education expenses eligible for the tax exclusion.
Revocable Education Trusts & Revocable Living Trusts
A revocable education trust or a provision in your existing revocable living trust can provide you with significant flexibility for education expenses. When you create the trust, you can allocate the money and property to cover any expenses that are related to education. In addition to tuition and institutional fees, this also includes room and board and other personal needs associated with attending school.
Irrevocable Gifting Trusts
Similarly, an irrevocable gifting trust lets you specify which expenses can be covered by the beneficiary's share of the trust. The main difference is that by placing money and property into an irrevocable trust, you no longer have control over it. However, irrevocable gifting trusts offer tax advantages that revocable trusts don’t. The rules listed in the trust document will be used for the entirety of the trust’s existence, with some limited exceptions. You should consult with an experienced estate planning attorney to discuss contingencies that suit your situation.
No Major Restrictions
A Uniform Transfers to Minors Act or Uniform Gifts to Minors Act account does not have major restrictions on the use of the funds for educational purposes. When one of these accounts is created, the money or property is held by a custodian for the benefit of the minor. Because this property is technically owned by the minor, the custodian is supposed to manage, invest, and if appropriate, use the property for the benefit of the minor. When the beneficiary turns 18, they can do whatever they want with the funds without any restrictions.
Our dedicated legal professionals at Legacy Law Centers are here to help you create a flexible plan for education expenses you anticipate for your children. Please call us today at (571) 200-5559 to request your complimentary case review.