Grandparents who wish to play an active role in funding their grandchildren’s college educations should consider two types of trusts, grantor and Crummey trusts. As you examine the financing options, don’t forget about the impact the establishment of these trusts can have on your estate plan.
A trust can be established for your grandchild, and assets contributed to the trust, together with future appreciation, are removed from your taxable estate. These funds can be used for college expenses.
If the trust is structured as a “grantor trust” for income tax purposes, its income will be taxable to you, allowing the assets to grow tax-free for the benefit of the beneficiaries. Plus the income tax you pay further reduces your taxable estate.
On the downside, for financial aid purposes, a trust is considered the child’s asset, potentially reducing or eliminating the amount of aid available. Keep this in mind if your grandchild is hoping to qualify for financial aid.
Another potential downside is that grantor trust contributions are considered taxable gifts. But you can reduce or eliminate gift taxes by using your annual exclusion or your lifetime exemption to fund the trust.
To qualify for the annual exclusion, however, the beneficiary must receive a present interest. Gifts in trust are generally considered future interests, but you can convert these gifts to present interests by structuring the trust as a Crummey trust.