Setting money aside for your children’s or grandchildren’s education can be a meaningful way to support their future. In some cases, however, not all the funds are needed for college expenses. For example, your child or grandchild may receive a sizable scholarship, choose a trade school that is less costly, or decide to join the workforce after high school graduation. You may wonder what you can do with the excess money. The answer often depends on how the money is managed, how the savings are structured, and what kind of strategies are involved.
Trusts Created by You
Health education exclusion trust. A health education exclusion trust (HEET) can provide for the education and medical needs of multiple beneficiaries across more than one generation (typically grandchildren and great-grandchildren). If one beneficiary does not use all the funds, the money remains in trust and can be used to cover the qualified education or medical expenses of younger family members as they come along.
Gifting trust. With a gifting trust,you can include instructions about what should happen if education funds are not fully used. For example, you may allow the beneficiary to use the remaining funds for other goals such as purchasing a house, starting a business, or saving for retirement. You can also name a different beneficiary (e.g., a family member, a friend, or a charity) to receive the remaining amount.
Revocable living trust. If your estate plan uses a revocable living trust, you can include trust provisions directing the trustee to pay for a child’s or grandchild’s education after your death. The trust document can also specify what should happen if the full amount set aside for education is not needed (for example, allowing the remaining funds to pass to the beneficiary outright or be redistributed among other heirs). Because the trust is revocable, you can revise the instructions or add new contingencies at any time until you pass away or become incapacitated (unable to manage your own affairs).
Custodial Accounts
Uniform Transfers to Minors Act (UTMA) accounts and Uniform Gifts to Minors Act (UGMA) accounts hold money and property for a minor, and an adult custodian manages the account until the child reaches adulthood. The funds do not have to be used for education and can generally be spent for the child’s benefit, though they should not pay for everyday parental responsibilities such as food, clothing, or housing. The assets legally belong to the child. Once the child reaches the age of majority (usually 18 or 21, depending on the state), the account is transferred to them outright, and they can use the money for any purpose, even if they choose not to pursue higher education. In other words, there is no way for the original contributor to reclaim unused funds. If the minor passes away before the account is turned over, any remaining funds are distributed according to state intestacy law.
Achieving a Better Life Experience (ABLE) Accounts
For families of individuals with disabilities, Achieving a Better Life Experience (ABLE) accounts may also play a role in education planning. Designed for individuals with disabilities, ABLE accounts are tax-advantaged savings accounts that can be used for education as well as other qualified disability-related expenses. They allow a beneficiary with a qualifying disability to save money while preserving their eligibility for certain means-tested public benefits and supporting their overall quality of life. Because the funds can be used for a broad range of qualified expenses in addition to education, unused education savings can typically be redirected to other disability-related needs.
State or Federal Education Plans
Education savings plans such as 529 plans andCoverdell education savings accounts (ESAs) offer several options if the original beneficiary does not need the funds. In many cases, you can change the beneficiary to another qualifying family member or roll over the money into another account of the same type. Unlike 529 plans, Coverdell ESAs have a built-in distribution deadline. If there are funds remaining in the account when the beneficiary turns 30, the balance must generally be distributed within 30 days unless the beneficiary has special needs.
Recent tax law changes also provide an additional safety valve for unused 529 funds. If the account has been open for at least 15 years, up to $35,000 (lifetime limit) may be rolled in to a Roth individual retirement account (IRA) for the beneficiary, subject to annual contribution limits. In addition, up to $10,000 from a 529 plan can be used to repay qualified student loans for the beneficiary or their siblings.
Rolling over or changing beneficiaries typically does not trigger federal taxes, but state tax rules may vary, especially if you claimed a state tax deduction or credit when you made the original contribution. If the funds are ultimately withdrawn for noneducation expenses, the investment earnings will generally be subject to income tax as well as a 10 percent federal penalty.
We Are Here to Help
There are many different options for funding your family’s education future. We are here to assist you and your financial team in choosing the best strategy for your unique situation to ensure that your wishes for any unused funds are carried out. Contact us today to schedule a meeting.
