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Using a charitable trust to pay for college

Education Funding

The charitable remainder trust (CRT) is a versatile tool that enables you to support favorite charities while retaining an income stream. CRTs are popular because they can provide tax benefits, including when you use the trust to pay college expenses. For example, if you place appreciated securities in a CRT and use the trust assets to help pay for college, you may be able to avoid significant capital gains tax.

How it works

CRTs are irrevocable trusts that provide one or more charitable beneficiaries with a remainder interest. You contribute stock or other assets to the trust, which pays you or another non charitable beneficiary an income stream for life or for a term of 20 years or less. After that term, the remaining assets (which must initially have been worth at least 10% of the trust’s total value) are distributed to the charitable beneficiaries you’ve specified.

Typically, CRTs are designed as charitable remainder unitrusts (CRUTs), which pay out a fixed percentage of the trust’s value, recalculated annually. The percentage can range from 5% to 50%.

When you make contributions to the trust, you enjoy a charitable income tax deduction equal to the present value of the charitable beneficiary’s remainder interests. Also, because the trust is tax-exempt, the trustee can sell appreciated assets tax-free and reinvest the proceeds in income-producing assets. If you choose, annual payouts can be made to your children or grandchildren for college expenses.

FLIP-CRUT option

If your children are younger, the trust can be designed as a “FLIP-CRUT.” With this tool, the trustee places assets in investments that generate little or no income, allowing them to grow tax-free.

A FLIP-CRUT allows annual unitrust payments to accumulate for distribution in later years. On a specified date, or after a triggering event (such as a beneficiary beginning college), the trust automatically converts into an ordinary CRUT. The trustee shifts the assets into income-producing investments and begins distributing current unitrust payments to the non charitable beneficiaries.

Unitrust payments are taxable — likely at your tax rate. But with planning, the bulk of these payments will be taxed as long-term capital gains or qualified dividends.

Complex option

The CRT is a complex tool, and you’ll want to discuss your various options with legal and financial advisors. But if you’re looking for a way to fund college expenses while eventually also donating to charity and avoiding a big capital gains hit, it may fit the bill.

The information provided is not written or intended as specific tax or legal advice. Lenox employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.