Dolores M. Coulter

Attorney at Law

8341 Office Park Dr. Ste C

Grand Blanc, MI 48439

Phone:  (810) 603-0801




College Expenses

Dolores M. Coulter © January 2009

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Q.  I would like to set aside some money to help pay for college education expenses for my grandchildren but I am also worried about what will happen if my circumstances change and I need the money for myself in the future.  

It is often said that education is the best investment that anyone can make. As parents and grandparents we want to provide our children and grandchildren with the opportunity to develop their talents and skills to their fullest extent and encourage them to “reach for the stars”.  There are various planning strategies that family members can use to help pay for college education expenses, each of which has advantages and disadvantages that must be evaluated based on the family member’s individual circumstances. 

One option is to establish a trust for the benefit of your grandchildren to pay for college expenses.  You can establish and fund a trust during your lifetime or you can include provisions in your will that create the trust upon your death. A trust created during your lifetime can either be irrevocable or revocable. Funds that are transferred to an irrevocable trust are gifts – once they are given they cannot be taken back.  A revocable trust allows you to retain full control of your assets during your lifetime and provides for the distribution of trust assets upon your death without probate.  However the assets in a revocable trust are not protected from claims by your creditors.  With any type of trust you will need to consider whom you want to name as the trustee to manage the trust, including alternate trustees in the event the primary trustee is unable or unwilling to serve, whether you want to have a single trust for all of your grandchildren or separate trusts for each grandchild, and whether the trust should be limited to educational expenses or whether the trustee should have discretion to make other types of distributions.  You will also need to include provisions that cover the possibility that a grandchild does not attend college, becomes disabled, or dies before the complete distribution of the trust.  You can name the trust, whether it is created by your will or created during your lifetime, as the beneficiary of a life insurance policy, brokerage account, or bank account. 

A popular way to set aside money for college expenses is to open a “Section 529” college savings plan account for a designated beneficiary, typically a family member, but any person can be named as a beneficiary.  Section 529 refers to the section of the Internal Revenue Code that sets forth the requirements that state-sponsored tuition programs must meet to quality for favorable federal income tax treatment.  Section 529 tuition programs include prepaid tuition plans (such as the Michigan Education Trust) and college savings plans.  Michigan’s college savings plan, the Michigan Education Savings Program (MESP), is managed by TIAA-CREF (Teachers Insurance and Annuity Association of America-College Retirement Equities Fund) and offers state income tax advantages as well as the federal tax advantages.  There is a wealth of information on the MESP website,

Every state offers some type of Section 529 plan and you are not limited to Michigan’s plan; you can invest in any qualified state plan.  Funds invested in a Section 529 MESP account are not subject to federal or state income tax on the earnings that accrue. If money is withdrawn and used for qualified higher educational expenses, those distributions will be tax free. Qualified expenses include room and board (subject to certain limitations) as well as tuition, fees, and books.  If you create a Section 529 account for a grandchild you still retain some control over the account. You can change the beneficiary on the account to another family member of the beneficiary if, for example the original beneficiary doesn’t use all of the money or doesn’t need the money.  However if you need to “cash out” the account or you simply change your mind and want to withdraw the money for yourself you will pay a 10% penalty and will owe income tax on the earnings.  You can name a contingent owner for your Section 529 account who will automatically become the owner upon your death.  This will avoid probate of the account.

Some clients set up “in trust for” accounts at financial institutions or brokerage firms, naming a grandchild as the beneficiary, with the intention of using the funds for the grandchild’s college education.  These accounts are essentially a revocable trust.  If you open this type of account you can freely withdraw money during your lifetime.  Upon your death the account will pass to your named beneficiary who, assuming he/she is over the age of 18, is then free to do whatever he/she pleases with the money. 

These “in trust for” accounts are sometimes confused with accounts that are created under the Uniform Transfers to Minors Act (UTMA accounts).  However an UTMA account is treated as a gift to the minor which is held by a custodian for the minor’s benefit. Usually the person who creates the account names him/herself as the custodian.  The custodian can withdraw the money in the account but has a legal obligation to use the money for the minor’s benefit.  Furthermore, when the minor reaches age 18 (or age 21 if this was specified when the account was created), he/she becomes legally entitled to the funds in the account.

The rapidly escalating cost of higher education is making it more and more difficult for families to pay for college education expenses without incurring huge amounts of debt.  If you can afford it, helping your grandchildren with these expenses gives them a gift that, if they use it wisely, will last a lifetime and help them realize their dreams. 




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