Saving for College in Trust Accounts: The Pros and Cons of Trusts

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Clearly, funding trust accounts has some very real benefits when saving for your kids' future education expenses. Trusts also have a very strong downside. You have to decide whether the balance tips positive or negative for your own financial and family situation.

Trusts have these benefits:

• You have absolute flexibility in funding, choosing beneficiaries, investing, and deciding how much, when, and for what distributions may be made.
• These accounts keep control out of the hands of your kids but give them the benefit of your savings.
• A properly drafted trust protects you, and your family, from personal catastrophes and financial disruptions. Funds that are segregated in an irrevocable inter vivos trust (and your intentions when you put that money there) will survive your death, a divorce (either your own or one of your beneficiary's) or a remarriage, to name a few issues.
• You pay no penalties for failing to use the money for its intended purpose, and you can use what you don't use for education expenses to help purchase that first home, pay for your kid's wedding, or even start funding his retirement. You really have no limitations.

On the downside, if you plan to fund a trust for your child's education, depending on the eventual value of the trust, you may want to consider not even filling out the financial aid forms (which may actually be a positive, because these forms are bears). An irrevocable trust that you create for your child's benefit is counted as an asset of your child and is included at that nightmarish 20 percent rate when calculating the expected family contribution. When you add to that the costs, both administratively and in lost tax deferrals and exemptions, you may decide that other ways of saving better serve your purposes.