So, you’ve made a boatload of money. What do you want to do with it?
Linda Beerman, head of wealth strategies at CIBC Wealth Management in Atlanta, tells her rich clients they basically have three choices: use it for their lifestyle, give it to their kids and grandkids, or do something charitable. Invariably, she says that the reply is this: “’I really want to make sure my grandchildren are educated.’”
How can you accomplish education funding in a tax-efficient manner? “There are different vehicles for different people,” Beerman says. Here are three strategies. Some families use all three.
529 college savings plans are the best choice if the family is really just interested in getting the kids educated, Beerman says. The money grows tax-free and comes out tax-free if used for college and grad school (or K-12 expenses, thanks to the recent tax law changes effective this year). Pick a direct-sold plan to avoid advisor fees, and check your home state’s offering for state tax benefits.
529 plans work for savers of all income levels, but they’re an especially powerful tool for rich grandparents. A couple can frontload five-years-worth of contributions into these plans–$150,000 per child–using the current $15,000 annual gift tax exclusion amount. One drawback: there are limited investment choices. But Beerman says an age-based investment solution, which veers more conservative as the child nears college, is a good bet for most families.
The next option – a single trust – takes more effort to set up and maintain, but there’s more flexibility. The trustee (that could be you or your child) determines how to dole out the money based on the terms you wrote into the trust. So, you can provide for distributions for education—and more, say a down payment on a house or funds to start a business. The downside: You need a lawyer to draft the trust, and a tax pro to file a trust tax return each year.
Beerman says some families prefer the trust option over a 529 plan so they can have children as co-trustees sitting in on conversations on investments, asset allocation and distributions. In some cases, through the trust, the children will participate in investments with their parents or grandparents that they couldn’t make themselves.
For families thinking really long-term, there’s the option of a pot trust for a group of grandchildren that would have a longer tail to it. So, the investments could include hedge funds and private equity with 10-year-plus holding periods. Funding heirs’ education would be the main goal of the trust, but it would also be flexible to cover other needs. The trustee would manage it for the youngest beneficiary of the trust, with the goal of the money lasting as long as they live.
By funding these trusts now, grandparents are taking care of the education of future generations, taking that responsibility off the plate of their children, Beerman says. The new doubled $11 million estate and gift tax exemption—good through 2025 under the Trump tax cuts—makes it an opportune time to set these up.
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