Saving for College: A Brief Look at Popular Options

-William D. Clements, Esq.-


            With the costs of higher education constantly on the rise, it is not uncommon for parents and grandparents to begin planning for college expenses years before their child or grandchild might actually need the money. Aside from simply placing money in an ordinary savings account or mutual fund nicknamed “Johnny’s College Fund”, there are estate planning options available which not only provide a source of funds for college but also offer attractive tax savings and asset protection. This article will briefly explore three such options: 2503(c) trusts, 529 plans, and Crummey trusts.[1]


2503(c) Trusts


            Section 2503(c) of the Internal Revenue Code (“IRC”) provides that gifts for the benefit of an individual under the age of 21, but not immediately distributable to that individual,[2] will not be treated as future interests if certain criteria are met. The significance of this is that such gifts may qualify for the annual gift tax exclusion under IRC § 2503(b), saving the donor gift taxes and potential estate taxes by reducing the value of his/her estate.


The primary problem with these trusts is the requirement that all assets must be distributed to the beneficiary when he/she turns 21. At that point, the beneficiary might not be out of college (or might not have even enrolled in college), and the funds might not have been exhausted. For various reasons, the donor might not want the beneficiary to receive a large distribution at what is still a relatively young age. Also, the mandatory distribution age removes any and all asset protection benefits of having a trust. If the beneficiary has racked up significant debts, any remaining funds will be fair game to his/her creditors.


529 Plans


One of the most popular college saving options is 529 plans. These plans are sponsored by individual states, as well as some higher education institutions, and they offer attractive tax incentives. For starters, they allow income taxes to be deferred, or avoided entirely as long as the funds are spent on qualified higher education expenses (tuition, room and board, etc). Furthermore, they can also be used to reduce the value of the donor’s estate, thus reducing or potentially eliminating estate tax liability. Additionally, unused funds can be shifted to another beneficiary (in the same family as the original beneficiary) or recaptured by the donor (keep reading for the catch).


            The tax incentives do come at a price. There is a cap on how much money can be contributed to the plan (which impacts potential estate tax savings). Also, if the funds are not spent on qualified higher education expenses, they will be subject to income tax plus a 10% penalty. The same will be true if the funds are recaptured by the donor. Perhaps the most significant drawback is the lack of control over how contributions are invested – something that is determined by the plan itself and can restrict the return on investment.


Crummey Trusts


A third option which should be considered and might in fact be preferred by some clients is the Crummey trust. Rather unfortunately named after the Crummey family, these trusts have been a common estate planning tool since 1968. The trust is basically an irrevocable trust capable of reducing a grantor’s taxable estate by utilizing his/her annual gift tax exclusions. This is accomplished by so-called “Crummey powers”, which grant the beneficiary a right to withdraw contributed funds for a relatively brief window of time (satisfying the “present interest” requirement specified in the IRC), after which the right to withdraw lapses (if not exercised) and the funds become subject to the terms of the trust.


In most cases there are no income tax advantages to setting up a Crummey trust (in fact, unless the trust is set up to shift income to the grantor or beneficiary, it could actually result in higher taxes[3]). But the Crummey trust does offer some attractive advantages which should not be overlooked. Compared to other college saving alternatives, the Crummey trust offers the broadest investment options (limited only by the terms of the trust as long as the investment vehicle is legal), the broadest possible use of the funds (there are no penalties if the funds are not spent on higher education), the greatest control over how the funds are spent, and the strongest asset protection (if the trustee’s distribution powers are discretionary).



You should give serious consideration to a Crummey trust if you:


·        Maxed out 529 contributions but still want/need to give more;

·        Want freedom to invest in real estate and other vehicles that fall outside the options available to 529 participants;

·        Want the beneficiaries to have the ability to spend the money on things other than higher education (e.g., a wedding, or a down payment on a first home);

·        Want to use annual gift tax exclusions to reduce the value of your taxable estate[4], but still want some level of control over how the gifts are used;




The table below highlights some of the key differences between the three college saving options discussed above.



2503(c) Trust

529 Plan

Crummey Trust

Reduce estate taxes




Income tax deferral / avoidance




No cap on contributions




Ability to change beneficiaries




No restriction on investments




Amounts not required to be distributed at age 21




Amounts not required to be spent on higher education








Asset protection



Can be set up without an attorney









This article is intended for general information purposes only and should not be taken as legal advice. You should speak to a licensed attorney before attempting to use any of the information contained in this article.




[1] These three options do not comprise an exhaustive list. For instance, Coverdell Education Savings Accounts (ESAs) are not covered by this article (in this author’s opinion, these accounts are restricted to the point of being useless in almost all cases).

[2] 2503(b) trusts are required to make annual distributions to the beneficiary. This is generally not a good idea when the beneficiary is a minor.

[3] The income tax brackets for estates and trusts are compressed. For example, in 2010, estates and trusts reached the maximum 35% tax rate with income exceeding $11,200, whereas an individual would not reach the maximum 35% tax rate until his income exceeded $373,651.

[4] This is especially important for singles who cannot take advantage of marital deductions and credit shelter (A-B) trusts.


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