What Are Educational Trusts and How Do They Work?

by | Feb 14, 2019

By: Barry E. Haimo, Esq.
December 11, 2018

What Are Educational Trusts and How Do They Work?

You don’t have to be extremely wealthy to set up a trust fund for your loved ones. With the right guidance from a knowledgeable Florida trust attorney, you can easily set up a trust that will last for generations.

Trust funds are an excellent way of bequeathing wealth to your loved ones in the way that you want it to benefit them. In addition to the flexibility that comes with bequeathing wealth through a trust, it’s easy for the grantor to set the rules, terms, and conditions that beneficiaries must fulfill for them to be able to benefit from the trust fund.

Educational trusts are some of the most common trusts in today’s world. But what are they exactly? How do they work?

What Is An Educational Trust?

Educational trusts are trusts where the money and/or property contained within go towards supporting someone’s education, or to establish or finance schools. In this article, we’re going to focus specifically on educational trusts created to fund the education of a loved one.

A grandparent may create an educational trust for his/her grandchildren, a parent for his/her children, or anyone else can do it who wishes to plan for the education of his/her loved one(s).

How Do Educational Trusts Work?

Here are a few terms related to educational trusts you should know.

  • A grantor is a person who transfers money or property into the trust.
  • Beneficiaries are the people for whom the trust is created. They benefit from the trust by having it finance their education.
  • The educational trust is managed and controlled by a trustee based on the terms set out for the trust.
  • Trust funds refer to the property and/or money available in the trust. Trustees give the trust funds to the beneficiaries according to the terms of the trust (e.g. educational trust funds are spent on the beneficiary’s education).
  • The trust is funded by the grantor transferring money or property into the trust.

Living Trust Vs. Testamentary Trust

A living educational trust becomes operational while the grantor is still alive. Living trusts are set up when the grantor feels that beneficiaries need the funds soon.

For example, a grantor may set up a living educational trust when their grandchild is about to go to college. Important to note: a gift tax may be attached to living trusts.

Testamentary educational trusts take effect only after the grantor’s demise. Such a trust may, for instance, be ideal when the beneficiary is very young, and the grantor is almost at the end of his or her life, or when the grantor feels that the beneficiary won’t be needing the trust funds until after the grantor has passed away.

Which type of trust is best for you will depend on your specific circumstances.

Sprinkling Educational Trusts Vs. Separate Educational Trusts

These two trusts are used when there are two or more beneficiaries. A sprinkling trust places the trust funds in a “pot,” and it’s the duty of the trustee to decide how much of the funds go to each beneficiary.

While this kind of a trust offers greater flexibility in meeting the unique educational needs of each beneficiary, it may cause strife among the recipients when one beneficiary gets more than the other.

By establishing separate educational trusts, the grantor gives each beneficiary an equal/fair share of the total fund.

The choice of which of the two options is best, however, lies with the grantor.

Education is not only a good gift for your loved one, it’s also one of the best legacies that anyone can leave. Speak to your attorney to learn more about how you can create an educational trust fund for your loved ones.

Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com 
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