Here’s another guest blog post from Rande Spiegelman, Vice President of Financial Planning for the Schwab Center for Financial Research. This time, Rande is taking on some of your questions about trusts and estates. 

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Q: We would like to put aside money to pay for our future grandkids’ college education. Is a trust account the best structure so controls can be pre-wired? –Jonathan ‘Jody’ G. 

When it comes to college funding, a custodial account can take the place of a trust in many cases and often with less hassle and cost. A custodial account generally has the same gift tax advantage as a more elaborate trust would (ability to utilize the current annual gift tax exclusion because the gift represents a “present interest” even though the beneficiary has no control over how the money gets spent). In some cases a trust may be preferable, especially if there are special needs or the trustee wants to place restrictions on the use of the money beyond the age of 18 or 21. 

Keep in mind, however, that neither a custodial account nor a trust will offer any special income tax advantages. If your goal is to keep some control over the money while saving for education expenses in the most tax-efficient way possible, then consider a Coverdell Education Savings account and/or a 529 College Savings Plan. In any event, you should consult with a professional estate planner (attorney and/or CPA) on trust matters. For more, see my Market Insight article on schwab.com, Saving for College: Strategies for Success.

Q: We have friends whose financial advisors are telling them to put their house in their kids’ name when they get into their 70's. Does this make sense? These friends have worked hard to payoff their mortgages before they retired and they live comfortably--not wealthy people and relatively healthy. –James G.

If you transfer title in a home during your lifetime you’re making a reportable gift subject to IRS tax rules. Some parents do this through an irrevocable trust (e.g., a QPRT, or Qualified Personal Residence Trust) to take advantage of potential transfer tax discounts while still retaining the right to live in the property for a term of years. This approach could be advantageous for high net worth individuals who want to minimize their taxable estates, or even for low-income individuals who are worried about asset protection in the context of qualifying for state or federal benefits. 

Alternatively, your friends might consider placing their home (along with other assets) in a revocable living trust in order to retain full ownership rights while still providing a way for the kids to eventually have easier access to the property outside of probate. Which approach is best depends on their financial situation, tax status, personal goals, preferences and desires with respect to the transfer of assets during or after lifetime. It’s important to discuss these issues with a qualified estate planner. For more, see my Market Insight article on schwab.com, Sophisticated Estate Planning Strategies.

IMPORTANT DISCLOSURES
This information is for general informational purposes only and is not intended as an individualized recommendation or a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.

All expressions of opinion are subject to change without notice in reaction to shifting markets, as well as tax and estate planning rules.

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