We are all faced with the rising cost of education. Every year those costs are increasing faster than inflation making it more difficult for parents to afford a quality education for their children. One solution to these escalating educational costs is for parents or grandparents to establish a CRT in which the income is used for a child’s or grandchild’s education.
If you give money directly to your children or grandchildren for their college expenses, the gift will not be tax deductible and it may even be subject to gift taxes. If you create a CRT, you will receive an immediate income tax deduction for the assets transferred to it because when the trust ends, any remaining assets will be distributed for charitable purposes.
For example, assume you have a grandchild who will be starting college in a few years. Also assume that you own stock purchased many years ago that has increased substantially in value, but pays only small dividends.
You could sell the stock, pay the capital gains taxes, and then gift the remaining proceeds to your grandchild to pay for college. The gift, however, will not be tax deductible, it might be subject to gift taxation, and you will lose control over how your grandchild uses the money.
A wiser option might be to transfer the asset to a charitable trust designed to produce income for your grandchild’s education. In this happier scenario, you will be entitled to a tax deduction for the transfer because the trust will last only a few years (up to the year of the budding scholar’s anticipated college graduation) after which the remainder will be distributed for charitable purposes.
The CRT will then sell and invest the asset gift tax-free. Each year, according to your instructions, the CRT will pay a fixed amount only for your grandchild’s education. After your grandchild graduates, your CRT will make your charitable dreams a reality.