Planning for your child's future, especially their education, can be one of the most important financial decisions a young parent makes. While options like UTMA (Uniform Transfers to Minors Act) accounts and 529 plans are popular, using trusts offers unique flexibility and benefits that can help you navigate education savings while maintaining greater control over your assets. Let's explore how trusts compare to other common education savings options and why they can be a valuable tool for young parents.
UTMA accounts allow parents to transfer assets to a child while maintaining control of those assets until the child reaches a certain age, typically 18 or 21 depending on the state. In Massachusetts, the age that a child can receive their UTMA account is 21. However, once the child reaches the designated age, the funds become their property with no restrictions on how the money can be used, whatsoever. This means your child could potentially spend the money on non-educational expenses. While UTMA accounts offer tax advantages and the flexibility to fund any type of expense, the lack of control once the child turns 21 can be a downside for parents who want to ensure the money is used wisely. If you have done a good job of funding this account over the years and benefited from compound interest, this account could have a considerable amount saved up. No matter how mature your child is at 21, receiving such a considerable amount with no restrictions whatsoever can be difficult for many parents to come to terms with.
A 529 plan is a tax-advantaged savings plan designed specifically for education expenses. Contributions to a 529 plan grow tax-free, and withdrawals are also tax-free as long as they are used for qualified educational expenses, such as tuition, books, and other school-related costs. Starting in 2024, a new rule allows any unused assets in a 529 account to be rolled over into a Roth IRA in the beneficiary’s name without any tax implications or plan penalties. The rollover is limited to a lifetime total of $35,000 for each beneficiary, and only assets that have been in the account for at least 5 years can be moved into the Roth IRA. Another added benefit is that 529 accounts can be used for any type of higher education, even trade school if that is the path that your child chooses. However, if the funds are used for non-qualified expenses, they are subject to income tax and a 10% penalty. While 529 plans are excellent for parents certain that the funds will go toward education, they lack flexibility for other uses. Additionally, if your child does not attend college, you could face penalties or be forced to reallocate the funds to another beneficiary.
Unlike UTMA accounts and 529 plans, a trust offer more flexibility and control for parents looking to save for their child's education. Trusts allow you to set specific conditions on how and when the assets are used and offer various advantages over the more rigid structures of UTMA accounts and 529 plans.
One of the primary benefits of using a trust for education savings is that you can dictate when and how the funds are distributed to your children. For example, you can structure the trust so that your child only receives a portion of the assets at certain ages—such as 25, 30, or even later—helping to ensure that they are mature enough to handle the funds responsibly. This differs significantly from UTMA accounts, where funds automatically become the child's property at a fixed age, without any further control or oversight.
Unlike 529 plans, which must be used for qualified educational expenses, trusts offer far greater flexibility in how the funds can be spent. If your child decides not to attend college, or if their educational expenses are covered by scholarships or other means, you won’t be penalized for using the funds for non-educational purposes. Trust assets can be used for a broader range of expenses, such as starting a business, purchasing a home, or getting married, which give your child more avenues to leverage your hard-earned savings.
When you create a trust, you can choose between a revocable or irrevocable trust. For a full overview of the different types of trusts, along with the advantages and disadvantages to each type, please read our full legal blog post here. A revocable trust allows you to change the terms of the trust or revoke it entirely, offering flexibility that a 529 plan or UTMA account does not provide. This power is invaluable when it comes to the amount of time you will be saving for your child before they reach adulthood. You retain full control to amend your trust, whether a large milestone comes sooner than expected so you want funds to be made available sooner than you originally anticipated for your child. Or perhaps your child struggles with the law or addiction, so you want to adjust the trust to delay the funds from becoming available to them until certain conditions are met. While irrevocable trusts have certain tax advantages, a revocable trust can be a powerful tool for young parents who want to maintain control over the assets while their children are young.
A method gaining traction in the estate planning community is the use of a trust as a tool for parents who want to motivate their children to reach important life milestones. Rather than simply setting an age for when a child can access the trust funds, parents can incorporate specific conditions (known as a condition precedent) that must be met before distributions are made. For example, a trust could be structured to release funds upon the child’s graduation from college, the birth of their own child, or the purchase of a first home. This method not only provides financial support but also encourages responsible life choices and personal growth. By tailoring the terms of the trust to align with the families values and goals for their children, parents can help guide their children’s futures while providing financial security and support along the way.
Trusts can also protect your assets from creditors and potential lawsuits. If your child encounters financial difficulties or legal issues down the line, assets in the trust are generally protected from creditors, ensuring that the funds will still be available when your child needs them. A properly crafted revocable trust will incorporate what is called a spendthrift provision. This ensures that if your child falls into substantial debt or becomes financially unstable, they cannot voluntarily assign their future interest as a beneficiary in the trust to a third-party creditor. This gives you, the Settlor of the trust, reassurance and peace of mind that only the beneficiaries that you explicitly select will receive the funds held in the trust. For a full overview of the different parties to a Trust, a Will, and your entire estate plan, please read our full legal blog post here!
Trusts can also offer tax advantages, particularly for larger estates. You can structure the trust in such a way that it minimizes estate taxes upon your death. While a 529 plan offers tax-free growth for education expenses, a trust can be part of a broader estate planning strategy that helps preserve wealth for your heirs, beyond just covering the costs of education.
Let’s say that the year before you have your first and only child you purchased a home worth $500,00. The year that your child is born, you also set up a brokerage account for your child’s benefit that you put $1,000 into every year. Over the years, the home’s value appreciates to $800,000 by the time your child reaches the age of 21. If we assume that you averaged a return of 8% every year on your brokerage account, with compound interest you would end up with just under $54,500 dollars when your child turns 21. To put this into perspective, had you saved the exact same amount but placed your money in a UTMA account, that $54,5000 would belong solely to your child on their 21st birthday. That sure is a lot of money for a 21-year-old and likely wouldn’t last long!
But instead, during that time you and your spouse created a Revocable Living Trust, and you titled both your home and the brokerage account into the name of the trust. First off, this creates monumental savings on the appreciation of your house for your child, compared to gifting the house directly to them which would result in significant capital gains taxes. For a full overview of what a stepped-up tax basis is and how it can help in your estate plan, please read our full legal blog here. Now that your child is 21 and off to college or trade school, you and your spouse sell your house and downsize, which leaves you with the $300,000 proceeds of the sale that are now also held in trust. This brings the total amount of trust assets to $354,500 (and counting if you continue to invest these assets and accumulate interest).
The terms of the trust can now outline exactly how you and your spouse would like these assets distributed over the coming years. Whether for education, business ventures, or other purposes, while allowing the assets to grow tax-efficiently within the trust. The child can receive the funds in increments at ages you choose (commonly at 25 and 30), or you could motivate your child by giving them a set dollar amount upon the happening of a specific event, like a college graduation. Utilizing a Revocable Trust is a valuable tool in your estate plan, which will ensure that your hard-earned assets are left to your children responsibly so they don’t spend it all in one place. Which, who are we kidding, they most certainly would have if they had received that $54,500 as a 21st birthday present!
While UTMA accounts and 529 plans are both popular options for education savings, they come with limitations that may not suit every family. This article is not intended to deter you from utilizing these types of accounts as they make for fantastic supplements to a strong financial and estate plan. Trusts, however, provide parents with greater control over how and when assets are distributed, while also offering flexibility in how the funds can be used. Whether you're looking to ensure that your child uses the money wisely, protect assets from creditors, or maximize tax advantages, trusts offer a versatile and powerful solution for young parents planning for their children’s future.
This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.