Bad Wills Keep Kids Out of College

Fundamentally, good estate planning is spending a small part of your estate (typically less than 1%) to significantly reduce the harm that will occur if certain bad things (with risks much higher than 1%) occur. One great tool for this is the trust.

There are lots of estate planning reasons for trusts. They can be complex and expensive, but fundamentally they protect the assets and family of a decedent. If drafted correctly, they protect them from creditors, they protect them from disability, they protect them from substance abuse problems, they protect them from the IRS, they protect them from state taxing authorities, they protect them from naivete, and they protect them from running out of money. They don’t entirely eliminate risk, but they can reduce risk.

But the key phrase in that paragraph was “if drafted correctly.”

Suppose (in your will) you leave a trust in shares for your children until after they are through college, at which point whatever is left in either share will be distributed among your children equally at age 30. On its face, this is a reasonable idea: you care about their education, you want them all to have an equal chance at education, but when education is done you just want whatever is left to go to them all evenly.

But there’s a hidden problem with this idea. Suppose you have two minor children, Alice and Rob, and leave $500,000 in trust for them. The 500,000 is divided into two trust shares of $250,000 each. A few years pass as some of each trust is spent for the children’s health, education, support, and maintenance. Alice begins attendance at a good but inexpensive college. A few years later, Rob begins expensive at a very expensive college. By Rob’s senior year, he runs out of money in his trust share, but there is still money in Alice’s trust share.

Because Rob has a remainder interest in Alice’s trust share, he will need to report the trust as an asset on his financial aid form. But the trust terms will not allow him to access the money until Alice turns 30. Suddenly he is ineligible for financial aid, and he can’t use the money in Alice’s share either. As a result, Rob may not be able to finish college.

It’s a terrible situation for a 21-year-old with a world of opportunity otherwise in front of him. Maybe he can mitigate the harm–but far better it is to have avoided the danger in the first place. This is why estate planning decisions need to be made carefully.

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