Your child may be years away from choosing a college, trade program, or another path. How can you start saving without knowing what they’ll need? A 529 plan, trust, custodial account, or lifetime gift can help fund their education. Each offers a different level of control over when the money is used and what happens if your child’s plans change.
As you decide where to set money aside, consider how those choices fit with the rest of your estate plan. That includes what you intend to leave your other children and who could manage the funds if you no longer can.
How Can a 529 Plan Fit Into Your Estate Plan?
A 529 plan lets you set aside money for a designated beneficiary’s education. Earnings can grow without federal income tax, and withdrawals are generally tax-free when used for qualified education expenses. New Jersey residents who meet income requirements may also qualify for a state tax deduction on contributions to an NJBEST account.
As the account owner, you generally direct how the funds are invested and withdrawn. That control lets you adjust your approach as your child’s education plans take shape. You should also check the plan’s rules for naming a successor owner, so someone you choose can manage the account if you no longer can.
A 529 plan can remain useful if your child’s path changes. You may be able to change the beneficiary to another eligible family member without federal tax consequences. Other uses, including certain rollovers to the beneficiary’s Roth IRA, have specific requirements.
Can a Trust Pay for Your Child’s Education?
A trust can give you more say over how an inheritance is used. You can direct a trustee to pay tuition and other education costs while also allowing distributions for your child’s other needs. Your instructions might cover vocational training or provide for a child who chooses to work instead of attending college.
You can also decide when your child receives any funds that remain. For example, the trustee might manage the money through early adulthood rather than distribute the full balance at a set age. The terms need to reflect your family’s goals and identify someone willing to carry them out.
A trust can hold money you set aside now or assets your child may receive later. If you intend for life insurance proceeds or other assets to go into the trust, review the beneficiary designations and account titles to make sure they support that plan.
What Do Custodial Accounts and Lifetime Gifts Offer?
Under New Jersey’s Uniform Transfers to Minors Act (UTMA), you can transfer assets to a custodian who manages them for your child. The assets belong to the child, and the custodianship ends at an age set by applicable law and the terms of the transfer. After that, the child controls the property. A UTMA account therefore offers less long-term control over education spending than a trust.
Lifetime gifts offer another way to help. You could contribute to a 529 plan or give your child funds directly. If tuition is due now, paying an eligible educational institution directly may have a different federal gift-tax treatment from giving money to your child to pay the bill. That treatment applies to qualifying tuition payments, not expenses such as books or room and board. Review a substantial gift with a tax professional before making it.
What If Your Child Does Not Pursue Higher Education?
Consider that possibility before choosing where to put the money. A 529 plan may support other qualified education paths, and changing its beneficiary may be an option. A properly drafted trust can allow the trustee to use funds for goals beyond education, according to the instructions you set. UTMA assets remain your child’s property regardless of whether they attend school.
You do not have to rely on one tool. A 529 plan might cover expected education costs while a trust provides broader support if your child’s needs change.
How Should Education Funding Work With the Rest of Your Estate Plan?
Start with what you want the money to accomplish. A 529 plan may cover expected education costs, while a trust could provide support if your child’s needs or plans change. Then consider how much you can set aside and how those choices affect what you intend to leave each child.
As you review your plan, ask:
- Are your 529 beneficiary and successor owner choices up to date?
- Do your life insurance and other beneficiary designations direct funds where you intend?
- Who would manage money for your child if you could not?
- Would there be enough accessible funds to meet your child’s needs?
We can help you coordinate these decisions with your will, trust, and other estate planning documents.
Make Your Child’s Future Part of the Plan
Education funding works best when someone can carry out your wishes even if your circumstances change. Contact E.A. Goodman Law, LLC to discuss your goals for your child and build a New Jersey estate plan that supports them through school and beyond.
Posted in: Estate Planning