529 vs trust

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boglebrain
Posts: 125
Joined: Sat Mar 15, 2014 9:55 am

529 vs trust

Post by boglebrain »

I've already super-funded a 529 for a child meaning I funded it when they were born and spread the funding over 5 years that I reported on the gift tax returns. Now if my child goes to a very expensive school or goes on to grad/med/business it is not quite enough to fully cover everything. If, on the other hand, they go to an in-state school it is about enough.

My decision: I could do another big gift and spread it out over 5 years or setup a trust and use annual $14k gifts per parent to fund the trust.

The advantages of the 529 plan:
1) I can do the super-funding now so that one enjoys more compounding vs making annual gifts below the gift limit
2) I have more control over the 529 in that if for some reason I need the money I can claw it back and pay the 10% additional penalty.
3) If there ends up being unspent money in the 529 plan I can transfer account ownership to another relative or my child and the child can later use it for their children. This ownership is nice in that if the child is very irresponsible you can effectively exert control over that money.
4) The 529 plans (Fidelity or Vanguard) are low-cost and with a trust it is a pain to find a 3rd party to do the compliance and invest it for a reasonable fee. Typical fees (even Vanguard) are some $2k minimum and 1% of assets managed. Those services only make sense for a very large inherited trust and not for a "Crummey Trust." The trust is irrevocable so I cannot manage it.
5) You get these assets out of your estate today which does protect it from any creditors or liability issues.

I also ran some numbers and assumed identical growth rates (e.g. 7%) but assumed the trust had 2% dividend rate and 5% growth rate so still 7%. I assumed 15% tax rate on dividends and a final ordinary income tax rate of 25%. If you run this for 20 years and end up not using any of this additional contribution and take a non-qualified withdrawal in one year you end up ahead with the 529 plan even taking into account the penalty. The difference is not huge but about 5% better for the 529 plan route.

So given all of this does this additional super-funding strategy make sense? I do realize there is a lot unknown with future tax rates and 529 law changes. But given what I know now this sense?
livesoft
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Re: 529 vs trust

Post by livesoft »

Why a trust when one could do a plain ol' UTMA account?
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bsteiner
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Joined: Sat Oct 20, 2012 9:39 pm
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Re: 529 vs trust

Post by bsteiner »

livesoft wrote:Why a trust when one could do a plain ol' UTMA account?
A trust lets you control it beyond age 18 or 21 or 25.

A trust can be set up as a grantor trust, in which you pay the income tax on the trust's income and gains. Each time you pay income tax on the trust's income and gains, you're effectively shifting additional wealth out of your estate.

The advantage of this over the 529 plan for people who expect to pay estate tax is that it you can pay for the child's education and also give the child an annual exclusion gift.
Topic Author
boglebrain
Posts: 125
Joined: Sat Mar 15, 2014 9:55 am

Re: 529 vs trust

Post by boglebrain »

@bsteiner

I see what you are saying. That is you pay for the education expenses when they happen but for now you fund trust to get the gift tax exclusion benefit.

Are their inexpensive trust management solutions you can recommend?
samsmith
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Joined: Sun Mar 15, 2015 9:33 am

Re: 529 vs trust

Post by samsmith »

The most inexpensive "trust management" company would be yourself. The grantor trust that bsteiner mentioned should use your SSN. You should be able to be trustee and grantor of the trust - your kids are the beneficiary. Open up an account at vanguard or fidelity or Schwab (etc) in trusts name. Invest in whatever you want. Pay the taxes on your tax return. Done.
bsteiner
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Location: NYC/NJ/FL

Re: 529 vs trust

Post by bsteiner »

boglebrain wrote:@bsteiner

I see what you are saying. That is you pay for the education expenses when they happen but for now you fund trust to get the gift tax exclusion benefit.

Are their inexpensive trust management solutions you can recommend?
The doubling up occurs when the child is in college. You can pay for your child's college education AND give him/her $14,000 ($28,000 for a married couple). In the case of a grandchild, the student's grandparents can pay the tuition AND give the student $14,000 ($28,000 for a married couple, and the student's parents can pay the expenses other than tuition AND give the student $14,000 ($28.000 for a married couple).

Of course, this is only relevant for people who expect to have taxable estates. People who don't expect to have taxable estates may wish to consider 529 plans. Some states, such as New York, allow an income tax deduction (with limitations) for contributions to 529 plans.

A lawyer can prepare the trust agreement. While there's some cost to that, the good thing is that if you have more than one child or (or more than one grandchild on the same branch) there's little or no additional cost to creating identical trusts for each of them.
Topic Author
boglebrain
Posts: 125
Joined: Sat Mar 15, 2014 9:55 am

Re: 529 vs trust

Post by boglebrain »

Thanks for the information @bsteiner.

If you make a grantor's trust isn't that's still keeping the money in the estate? That is, you want to make an irrevocable trust with the trustee being someone other than the grantor. You then have to also do Crummey notices and file separate 1041 returns.

Can the guardian file the taxes and manage the investments but you have a trustee be a friend or relative or corporation that does this? The trustee will then disburse funds out of the trust in accordance with the rules.
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