Education Trusts

My Massachusetts and Rhode Island estate planning clients often ask whether they should set up individual trusts for each of their minor children.  With college costs going up every year, they worry about putting their children through college when that time comes, and recognize that college costs go up every year, whether or not the parents are still alive.  Setting up education trusts for your kids or grandkids is a good way to hedge your bets on rising college costs.

Uniform Transfers to Minors Act Accounts

First, I need to mention the Uniform Transfer to Minors Act (UTMA), a state statute which allows parents to set up custodial bank or investment accounts for their minor children that have some features of a trust.

The advantage of these accounts is that you can create them easily and inexpensively without the assistance of an attorney.  You just go to your bank or financial planner to set up the UTMA account.  You can set these up during your lifetime, or fund them with a bequest in your will.

The problem with UTMA accounts is that they are “one-size-fits-all accounts” controlled by statute, and so are very inflexible.  The statute requires that your children will get outright control over the funds as soon as they reach age 21.  No exceptions.  Although 21 may be the legal age of maturity, each of us knows persons of that age that lack the emotional or financial maturity to handle these funds.  So what are the better alternatives to an UTMA account?

Individual Child Trusts

If you have more than one child, you know that no two children are ever alike, and it helps to think about the individual, and maybe different needs of each.

One option is to set up an individual trust for each child.  Each trust has its own trustee.  The benefit of this arrangement is that you fund each trust separately, depending on the individual and differing needs of each child.

One disadvantage of this that you may fund each trust with equal property, and it later develops that one of your children has or will have greater needs during their lifetime than the others.

Although you can pick one person to serve as trustee for all your individual trusts, the trustee cannot commingle the trusts’ funds, even to meet one child’s greater needs; he or she must keep each trust’s property separate at all times.

With individual trusts, you can treat each child differently by deciding the age when each will be eligible to receive control over the trust monies.  For example, if son Tom is more irresponsible than his sister Kate, you can set up Tom’s trust so he does not get control of any trust property until age 30 when you think he would be more mature; while Kate’s trust can be set up for age 21.

Family Pot Trusts: More flexible with changing needs

Another alternative is to create a family pot trust; a single trust with all of your minor children as the beneficiaries.

Your trustee manages a single trust fund, and has the discretion to distribute the trust property to each child according to his individual needs.  This way if individual needs change, the trustee has authority to make adjustments to meet those needs.

In a family pot trust, all of the children take control of their trust property at a fixed time, usually when the youngest reaches a certain age, say 21.  This usually works well only when your children are relatively close in age.  For example, if John is 16 and Sue 3 when you create the trust, John would not get control until he was 34.  You may want this if Tom is irresponsible, but not if he is as responsible as Kate.  If John and Sue are equally responsible, you may want to set up individual trusts in this situation.

Providing for your children’s future financial needs, such as the rising costs of higher education, is one of the most important reasons why my clients seek out an estate planning attorney.   If you have minor children, and are worried they may not be able to afford college or graduate school when the time comes, don’t delay, call us today at 508-316-3853.  The sooner you start an education trust, the larger the nest egg will be when your kids need it!