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The Charitable Education Trust: A Way for Parents and Grandparents to Help Family Members and Us

Posted January 2016

Many parents and grandparents have invested in a Section 529 plan to fund the college education of a child. Although contributions to the plan are not deductible, the principal grows on a tax-deferred basis, and distributions for college expenses are exempt from income tax.

Another arrangement, appropriate for parents and grandparents who want to fund the education of a child or grandchild and also make a charitable gift, is the charitable education trust.

Example: George and Sandra have a granddaughter, aged 11, and they would like to fund a substantial portion of their granddaughter’s college expenses and also make a future gift to our organization. To accomplish both objectives, they transfer stock having a fair-market value of $200,000 and a cost basis of $50,000 to a special kind of charitable remainder unitrust.

This trust will pay only the net income to their granddaughter until the summer before she enrolls in college. Then for five years it will make semi-annual payments equal to 10 percent of the value of trust assets, as determined at the beginning of each year.

The contribution is invested for growth until the granddaughter reaches college age, and the net income paid to her before then is minimal. Assuming the trust principal grows at 6 percent, the granddaughter would receive approximately $30,000 the first year of college and slightly lesser amounts for successive years.

George and Sandra receive an immediate charitable deduction of almost $58,000, and they are not taxed on the capital gain in the contributed stock. They avoid paying any gift tax because of their lifetime exemption. At the end of 12 years, more than $240,000 will be distributed to our organization.

The advantage of this plan is that George and Sandra can fund it with appreciated property, avoid tax on the gain, save income tax, and fulfill a charitable objective. The disadvantage is that, unlike the 529 plan, payments to the beneficiary are not tax-exempt. But the granddaughter is most likely going to be in a low tax bracket.

The charitable education trust is a creative option for those who want to combine a charitable gift with college funding. Contact us for more information.

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