Save for College Using a Trust

Money and teenagers are like oil and water - easily separated. Yet if you can't qualify for financial aid, one way to save money for college and not get killed by taxes is to put the money in your child's name.

You've probably heard about the Uniform Gift to Minors Act (UGMA) account where you can put assets in a custodial account to benefit your child. The income earned on assets in UGMA accounts is taxed at your child's lower tax rate.

But there's one big drawback with this idea - you have no control of the account's assets once your child hits legal age. If Junior decides not to go to college, he can take the money and run. You can maintain control of your money and your child's educational goals with a Crummey Trust. Here's what you can do with this trust:

• Include provisions that limit the amount your child can withdraw so he or she can only take out the trust's income - not any principal. Eventually, the trust assets have to be paid out to your child, but unlike a UGMA Account, with a Crummey Trust you can set the age for final distribution at any age beyond 21. Set the age at 25 and your kid will have money for graduate school, too!


• Tie income distribution directly to college attendance. If your child decides to become a beach bum after high school, that's fine - but at least you won't be financing any sand castles or surfboards.


• Have the trustee pay out income at his or her discretion. The trustee, not your child, decides if a blow-out beer bash is a bona fide college expense.
  
  Smart Money Move: Appoint someone other than yourself as the trustee. Otherwise you're not deemed to have given up control of the funds, and the trust assets can be considered part of your estate if you die before distribution. The best trustee is a close relative or friend who understands and will abide by your wishes.

Interested in more college saving strategies? Check out these articles:

• Best Ways to Save for College
• Help Your Kids Win Scholarships
• 5 Top Financial Aid Myths