Using a Testamentary Trust to Provide for Grandchildren’s’ Education
When grandparents begin the estate planning process, often they want to leave money to their grandchildren in a will. However, what are the best options to leave money to grandchildren when the grandparent wants to make sure that those funds are used for the child’s college expenses and not blown on unnecessary or frivolous extravagances? To designate the funds for specific purposes to use as intended, grandparents can create a testamentary trust to take effect after their deaths and explicitly provide for the grandchild’s education.
A testamentary trust is a trust created by a will. Therefore, the trust does not go into effect until the grandparent dies. In the will, the grandparent needs to make a special section that includes language expressly creating the trust. The assets to place into the trust must be identified and it is important to include a description of what those funds are to be used for, and when. Identify the grandchild as the beneficiary (the individual who benefits from the trust), then choose and designate a trustee, to manage the trust on the grandchild’s behalf.
As the creator of the testamentary trust, the grandparent can change the terms of the trust any time before death by contacting a lawyer to make changes to the will. However, once the grandparent dies, the trust becomes irrevocable and cannot be changed. Instead, it goes through probate — the legal process of administering a decedent’s estate — where the probate court monitors its administration until the trust has done what it is supposed to do for the beneficiary. Since the terms of the trust will be carried out after death, the choice of trustee is especially important. This person has a fiduciary duty to carry out the grandparent’s wishes as outlined in the trust.
Once a grandparent makes the decision to set up a testamentary trust for her grandchild’s college education, she must next consider how she wants the funds to be used to achieve that goal. The terms of the trust can be as flexible or as restrictive as she chooses. For example, she may want to limit funds to the payment of tuition, books and boarding only. Another option is to distribute a lump sum payment upon the grandchild’s graduation from high school and enrollment in college. Alternatively, the trust can make a certain amount available at the beginning of each term and leave it up to the grandchild to decide where and how to spend it. Grandparents should also consider whether they want to limit funds to a particular type of institution, such as a private, public or vocational school.
It is important to include a clause in the testamentary trust that explicitly addresses what happens if a grandchild decides not to go to college. For example, the grandparent could instruct that funds would be distributed to the grandchild on her 30th birthday instead, or treat the failure to attend college as a forfeiture of the funds and distribute them to another family member.
Be sure to talk to your estate planning attorney about setting up a testamentary trust to benefit your grandchildren, to leave a financial legacy that also helps them further their education in an era of rising costs and expenses.