Investing in a grandchild’s education creates a meaningful way to support their future while incorporating it into your estate plan. With the right approach, you provide financial assistance while minimizing tax burdens and ensuring your assets serve their intended purpose. There are several tools to help you structure this investment efficiently.
Establish a 529 college savings plan
A 529 plan offers a tax-advantaged way to save for educational expenses. Texas offers the Texas College Savings Plan and the Texas Guaranteed Tuition Plan, which allow funds to grow tax-free if used for qualified education expenses.
Contributions to a 529 plan may also reduce the taxable value of your estate, helping with long-term planning. You can contribute significant amounts to a 529 plan without triggering gift taxes, as long as you stay within the federal annual gift exclusion limit.
Use an irrevocable trust
An irrevocable trust allows you to set aside funds for a grandchild’s education while controlling how and when they use the money. A trust helps protect assets from creditors and ensures that funds go solely toward education. Texas law allows various trust structures, including 2503(c) trusts, which specifically benefit minors. By placing assets in an irrevocable trust, you remove them from your estate, potentially lowering estate tax liabilities.
Make direct tuition payments
Paying a grandchild’s tuition directly to an educational institution provides another effective way to invest in their education. Under federal tax law, these payments do not count toward your annual gift tax exclusion, allowing you to contribute more without tax consequences. Texas law does not impose state gift taxes, making this a straightforward and tax-efficient option for educational contributions.
Consider custodial accounts
A Uniform Transfers to Minors Act (UTMA) account lets you transfer assets to a grandchild while maintaining some control over how they use the funds. Texas follows the UTMA, permitting assets to remain in the minor’s name until they turn 21. While UTMA funds can cover education, they are not restricted to that purpose, making them a flexible but less controlled option.
Helping a grandchild with education expenses strengthens your estate plan. By choosing the right investment method, you maximize benefits while ensuring your legacy supports their future.