Most Americans know that higher education is a necessity for the next generation. Between the constant shifts in technology and the limited market for jobs, most adults need a college degree to distinguish themselves from the rest of the pack.
However, tuition costs are changing just as quickly as the economy, making it imperative to set up a plan to fund your child’s education while also making plans for yourself.
Section 529 Plans
One of the most common techniques for funding college for children and grandchildren is to set up a Section 529 Plan — which is a savings plan that is designed to cover education costs. When you set up the plan, you choose between two types of savings accounts. In Virginia, you can select a prepaid tuition plan or an education savings plan.
Once you open an account, you set aside the funds you want for the student, and federal taxes won’t touch the money. However, it can incur gift tax over time. Because of the gift tax, many families may choose a different type of plan instead.
A minor’s trust is great for many parents and grandparents because it allows you to make a gift to the trust and qualify for an annual gift tax exclusion. The trust doesn’t necessarily specify anything about educational purposes, but parents can set up a minor’s trust with the intention that the money will go toward funding their child’s education.
The transferred property can remain in trust until the donee is age 21. At that point, the donee has full control of those assets, and the donee does not need to use them for education purposes.
There are other ways to fund higher education, but these two techniques allow families to establish a secure place to hold the funds for their child until the right time.