A College Savings Trust gives parents a savings plan that is easier to manage, has far more security and provides much greater flexibility than 529 Plans.
Here is a quick comparison of a College Savings Trust vs 529 Plans.
A College Trust has zero adverse effect on applications. On the other hand, 529 Plans, Coverdell account and UGMA/UTMA accounts can have a serious negative impact on your child’s application for grants, loans and other financial aid.
"Sound complicated? It is. And we are only talking about the federal financial aid rules here -- each school can (and most will) set its own rules when handing out its own need-based scholarships, and many schools are starting to adjust awards when they discover 529 accounts in the family."
"...any withdrawals (from a 529 Plan) used to pay for their college will be counted as untaxed income on the FAFSA. Let's say a grandmother wants to cover a full year of her grandson's tuition at a private college, which costs $45,000. He'll be a freshman in 2017, and he plans on applying for financial aid every year. On his first and second FAFSA, he'll have nothing to report, but when he applies for federal aid for the 2019-20 school year (when he's required to report prior-prior year income) his untaxed student income that was generated from Grandma's gift may reduce his aid package by as much as $22,500 – Yikes!"
There are unlimited contributions as there are no tax penalties on college trust accounts in the event that the savings account is overfunded, or if they don't attend college and instead pursue other paths in life. This account has no limits, other than as prescribed by IRS rules (e.g. the $5,000,000 lifetime exemption). 529 Plans, on the other hand, have severe penalties if the account is "over funded" or if not used for exact, limited IRS-approved college expenses..
Not every child winds up going to college. Many people find fulfilling, well-paying careers and lives in various trades or professional services that may require a license or certificate, but not a college degree. These include computer programming, construction, nursing, teaching, social services, and so much more. The college savings trust can assist with all of these while a 529 plan cannot.
New graduates are often tempted to make some poor life choices when it comes to use of funds. Excessive travel or partying, purchasing expensive cars or other depreciating, illiquid assets, and poor business investments are all too common for 21-year-old kids with funds sitting in trust. Except with a college savings trust, the parents (grantors) continue to review and confirm or deny every expense request and the Trustee professionally manages the funds the trust as fiduciary. This continues until the age of ascension, usually 30 but may be whatever you set when you opened the account, at which time the trust can be liquidated if desired. Until then, funds cannot be wasted. Used to help buy a new home? Absolutely. Rent and living expenses? Yes, within reason. Cover medical and health issues? Definitely. Travel? Some, within reason. Starting a business or opening a practice? Sure, depending upon the circumstances (e.g. a newly graduated dentist purchasing a practice from a retiring dentist would likely be fine, a newly graduated communications major who wants to open a ski school in Orlando would be suspect).
Unlike an IRA, funds going into a college savings account are via after-tax dollars, not pre-tax (this is true regardless of whether it’s a trust or a 529 Plan). Taxes on investment income and realized capital gains may, or may not, be waived in a 529 Plan. For a 529 Plan to work you need to be 100% sure that your child will wind up going to an accredited college, 100% sure that the tuition and other IRS-approved expenses will be more (not less) than you saved, and 100% sure that you will never, ever need funds for healthcare, phone, travel, tutoring, or any other expenses that are not on the approved short-list. Otherwise you’ll pay not just income taxes but also a 10% penalty on those funds. Even if you do plan perfectly, the inflexibility, lack of asset protection and potential negative impact on grants and financial aid make 529 Plans less than ideal. With a College Savings Trust there are no such restrictions or tax penalties.
A college trust allows you to open an account the moment you get the wonderful news, enabling you to update the child's name once he or she is born. This lets you get a jump on savings, and can provide more meaningful baby showers and congratulations gifts with contributions to the College Savings Trust instead of yet another cute outfit or stuffed toy. 529 plans do not allow this and require that the baby be born AND have a social security number before an account can be opened.
Yes, really. That's one of the key benefits of a trust instead of a 529 or any other type of savings plan...savings in the trusts are protected by law, held for the benefit of the beneficiary and not attachable to judgements or claims. You can read more in our Trust FAQs.