In this blog, we explore the dilemma faced by individuals passionate about funding higher education or other passion projects through their estates. While 529 plans are commonly used to save for college expenses on a tax-free basis, they may not be the best fit for everyone. Instead, the blog delves into the advantages of utilizing a life insurance trust as a more flexible and efficient alternative. By examining a real client’s case and comparing the limitations of 529 plans, this blog aims to show readers how life insurance trusts can be tailored to address specific needs, provide lasting support for educational goals, and serve as a powerful tool for philanthropic endeavors. Whether you want to fund higher education for future generations or create a legacy endowment, continue reading to learn when and why you may want to consider using life insurance trusts and life insurance vs 529 College savings plans. offer valuable benefits and opportunities to make a positive impact.
A lot of our clients have projects or interests they’re very passionate about, so it’s only natural that they want to use their estates to fund these passion projects. This was the case with one of our clients who recently came to chat with us about funding higher education for students at her alma mater. She was considering something called a 529 plan, and while a 529 plan can be useful in funding higher education expenses, in this case, it wasn’t the most appropriate choice. Instead, we helped her create a generous educational fund through a life insurance trust. If funding education is important to you, then a life insurance trust might be a more flexible and efficient option than a 529 plan.
529 Plans: College Savings for Individual Students
The average cost of tuition at a four-year private college is $32,231, and that number goes up by about 3.1% over inflation every year. In response to rising tuition costs, states have implemented programs called 529 plans that allow people to pay for college on a tax-free basis.
A 529 plan is covered under Section 529 of the U.S. tax code and allows funders to save money for college on a tax-advantaged basis. The plan allows people to set up an account to benefit a student and fund it through a variety of investments. It’s a tax-advantaged account like a 401(k) or IRA, but it’s for education instead of retirement.
The problem with the 529 plan lies in its limitations. These plans are designed to cover only qualified expenses, such as tuition and fees, and books, supplies, and equipment used specifically for educational purposes. While there’s no limitation to how much you can save, the funds do have the potential to lose value because they’re often backed by mutual fund-type investments. They’re only designed to cover the basics of college expenses for a particular student. As a result, they’re really only appropriate for a parent who is looking to save for their child’s education in the near future.
But if you’re looking to fund a grandchild’s future education, or if you want to create an endowment or scholarship program, a life insurance trust is a better option for keeping up with the rising cost of tuition and allowing for maximum flexibility.
Life Insurance vs 529 College Saving Plans: How Life Trusts offer Added Flexibility
In the case of our client, she needed a bit more flexibility than a 529 plan would allow. She had a master’s degree and wanted to fund future students in the master’s program at her alma mater. She didn’t have a particular student in mind – she simply wanted to provide funding for students who might need it. Her goal was to create a program that covered multiple students’ living expenses by giving them each a monthly stipend.
This isn’t really something that can be covered under a 529 plan because basic living expenses aren’t considered qualified. Our client also didn’t know exactly who she’d be funding, which is required for a 529 plan. Finally, she wanted this to be an endowment that kept giving, and the higher risk of 529 plans makes them a poor choice for this.
To accomplish her goals, we created an endowment that’s funded through a life insurance trust. In an endowment, you choose a university and work with it to create a program of funding. You can be pretty flexible in who it benefits, and you can make it need-based, merit-based, or a little of both. You can also have it benefit a particular field of study or program.
The funding for this endowment comes from a life insurance trust. You can do this by donating the money to the trust, so it can purchase a policy in your name that lists the school as the beneficiary. This keeps the amount out of your estate, which means the school won’t have to go through probate to get the money for the endowment.
One of the benefits you get from this is that you can generate a large amount of funding for a relatively small premium. The growth of the policy could significantly increase over the rest of your life, allowing you to fund an entire legacy. Most schools start with a basic scholarship requiring a $10,000 minimum donation, while creating a legacy endowment usually starts at $100,000. Of course, this can change based on the field of study, the school, and the cost of the overall program, which is why giving an asset that grows as an endowment is the easiest way to fund the largest amount.
Creating a Trust for Your Grandchildren
For grandparents looking to fund their grandchildren’s future educations, life insurance can be used in a similar way. There are two options for this. The first option is simply listing the grandchild as your beneficiary on a life insurance policy. The problem here is that you won’t get any of the tax benefits for it, and it will be considered part of your estate. You also won’t be able to control how your grandchild spends the money. Your grandchild will simply receive the lump sum value and be free to do whatever he or she wants with it.
The first involves setting up a trust to benefit your grandchild and then having that trust purchase a policy on your life to ensure future funding for education. A trust allows you more control in ensuring those funds are used for college expenses because the money is paid out at the trustee’s discretion. It shelters your estate from taxes and can be used to fund anything from your grandchild’s education to a large endowment to help students everywhere continue their educations.
The best part of having money late in life is knowing that you can use it for good. Whether that means securing a higher education for your grandchildren or helping future students excel in a program that’s near and dear to you, life insurance can help you make it happen. For more information on endowment trusts or trusts for any other charitable project, contact a Howard Kaye advisor at 800-DIE-RICH and get started on a plan.
