This is the third in a series focusing on planning for children. The first article was focused on the importance of planning if you have step-children. The second article focused on the importance of planning if you have “special needs” children. This third article focuses on planning for education expenses.
You want the most for your child. Above all you want to make sure they get a good start in life. That includes getting the education and training they need for a good foundation and a good career. But, if you were to die before they’ve received that foundation, how can you be sure they would still get it?
One Way to Plan
You could leave them money at your death. But, if you leave money to them outright, they could use the money for something else. Here’s a sad, but illustrative story: Alice had a son, John. Alice died unexpectedly shortly after John’s 18th birthday. Alice had savings for John’s education, which she projected to cost $250,000. When Alice died, she had total assets of nearly $400,000, including the nest egg for John’s education. She left it all outright to John. But John fell in love and got married. The marriage didn’t last long, but between the expenses of the courtship and the divorce court, John lost $150,000 of his $400,000 nest egg. After the divorce court, John was concerned he didn’t have enough money anymore. He’d heard of people making money day trading in stocks, options, and commodities. He tried his hand at that. Unfortunately, the market moved against him and he lost everything. His inheritance, and his dreams of college, were gone.
A Better Way to Plan
Instead, Alice could have left her assets to John in a trust. Alice could have named her sister, Mary, as trustee to manage the assets in the trust until John had more maturity. This would have protected the assets from the divorce court. It would have kept John from being able to lose the money day trading. Mary, as trustee, could have invested the money safely. The trust could have directed Mary to use the assets for John’s education expenses and his basic living expenses while in school. If Alice had done that, John would have emerged from college with a degree and would still have had $150,000 left in his trust account. Mary, as trustee, could have lent John money from the trust as a down payment for his first house. He would have been on the way to responsibility. When he reached the suitable age which Alice had set, John could have become trustee of his own trust. At that point, he would have had the stability and maturity to manage the assets to help make a more stable future for himself and his family.
Alice wanted the best for John. But, by leaving those assets to John outright, she only set John up for a lifetime of regrets. A trust for the assets could have kept the assets secure and available for John’s education, setting him up for a lifetime of success.
The next article in the series will focus on how 529 plans can be used to supercharge education savings and how they can be used in combination with a trust.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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