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2020 Financial Markets Update

The Financial Truth in Action – Educational Trust

March 1, 2012

Providing our children a strong foundation in education is a tremendous asset not only for the child but for future generations. Last month, Michael Mandelbaum, our featured speaker and best-selling author of That Used to Be Us: How America Fell Behind in the World it Invented and How We Can Come Back, shared his thoughts on how Americans can strengthen our economy and better position ourselves globally. By investing in our youth they can receive the education they need to get the US back on the right track.

Fortunately, educational trusts provide parents and grandparents a powerful tool to pay educational expenses for their children and or grandchildren. With trusts, the senior generation has the ability to transfer wealth as well as pass on life-long values to the younger generation.
While terms vary widely, parents or grandparents may want to consider the following when establishing an educational trust:

• Who Benefits – Is your intention to provide for successive or future generations?

• Personality Differences– Consider the academic ability and maturity level of each beneficiary. Each beneficiary is unique and it is important to address the specific abilities and needs of each of them. Doing so may be complicated when the intended beneficiaries are young or not yet born.

• The Dollar Amount – Have you decided on the amount of money that will be transferred to the trust? It will need to be adequately funded in order to meet the needs and abilities of the beneficiaries as well as to account for the ever-increasing costs associated with higher education.

• Tax Implications – Many contributions, whether in trust or outright, will result in taxable gifts. Through well- considered trust planning, it is possible to minimize and possibly eliminate gift, estate and generation-skipping transfer taxes.

• Appropriate Trustee – You will need to decide and appoint the proper individual or corporate trustee to oversee the trust’s assets and administration. Choose an individual who will look out for the best interests of the trust as well as the beneficiary. You will also need to provide the trustee with the proper amount of discretion in administering the trust.

• Unforeseen Contingencies– Be sure to consider what happens to assets intended for a beneficiary if he or she does not attend college?

Knowledge to Prosper

In addition to trusts, there are other popular education savings tools to choose from including:

529 Plans – Earnings within 529 Plans grow tax-free as long as the funds are used for qualified higher-education expenses. Also, many states offer a state tax deduction or credit for contributions. Anyone is eligible to contribute to a 529 plan and there are no income limitations. However, the gift tax rules apply to contributions. 529 plans do have limitations on how you invest the savings, which typically include a handful of mutual funds. If 529 plan funds are not used for higher education expenses, earnings are taxed and a 10% penalty applies.

Coverdell Education Savings Accounts (ESA) – Earnings within an ESA grow tax-free as long as withdrawals are used for higher education expenses. However, eligibility phases out for contributions for married filing jointly adjusted gross income (AGI) between $190,000 and $220,000 (2012). Unlike 529 Plans, the funds can be invested in a variety of products. If ESA funds are not used for higher education expenses, earnings are taxed and a 10% penalty applies.

Custodial Accounts (UGMA/UTMA) – Earnings within Custodial Accounts do not grow tax free and regular tax rules apply. Generally, the child’s tax rate applies, however the kiddie tax rules can apply if annual investment income and gains exceed $1,900 (2012). Anyone is eligible to set up custodial accounts, although gift tax rules apply. Funds within custodial accounts can also be invested in a variety of products and distributions can be for any purpose. The biggest drawback of custodial accounts is once the beneficiary is of age, he or she gains control of the funds.

There are a number of decisions and considerations to be aware of when making educational gifts to children or grandchildren. We welcome the opportunity to discuss your intentions and possible concerns related to your family’s education and we look forward to helping you meet your goals.



First Western Trust cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.

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