Trust Provisions: A-B Trust vs. A Trust; College Planning: How to Fund Higher Education

We frequently mention that trusts are a good way to avoid the probate process, which takes time, costs money, and has an unknown outcome.

The A Trust and the A-B Trust are two popular types of trusts to help married or legal couples avoid probate, which we discuss on the most recent edition of our weekly radio and web broadcast on KDOW 1220 AM, Wealth Management and You with Connie Yi.

An A Trust is rather simple and is best for a couple with no children or other desired heirs. With this type of trust, when one partner dies, the surviving partner inherits and controls 100% of the deceased partner’s estate.

An example of an appropriate use of an A Trust would be a married couple who want to eventually leave their estate to a charitable organization, and who have no children and little concern about tax issues regarding their estate of less than $1 million.

An A-B Trust is currently well-suited for couples who have additional heirs and less than about $5 million, which is the current federal estate tax exemption level.

Congress may or may not extend the current death tax legislation, which is set to expire at the end of 2012, so estate planning during 2012 will be a bit confusing until we know one way or the other what the inheritance tax laws will be in 2013 and beyond.

The death benefits of a life insurance policy are consider a part of an estate that is subject to the current exemption level, unless they had been specifically assigned to an irrevocable trust as part of an estate plan.

When a spouse or legal partner dies, one tax-free “marital deduction” is available to the couple. If no estate plan and trust exist, the marital deduction is used by default when the first partner dies, so that when the second partner dies, the estate then becomes subject to an inheritance tax.

With an A-B Trust, the “marital deduction” would not be used when the first partner dies, because the estate passes to the trust, a “taxpayer” other than the surviving partner.

An A-B Trust is also a good way to ensure that the benefits intended for the surviving spouse and the couple’s children are separated, to protect the children’s inheritance from mismanagement by the surviving partner and his or her possible new spouse.

College Planning: How to Fund Higher Education

During this week’s show, we also spoke on the phone with Jeffrey Morrison of Campus Pathway about how parents can prepare for the expense of higher education for their children heading to college.

Jeffrey is a registered financial adviser who focuses on helping parents find, select and afford the best colleges for their children.

We initially discussed the current cost of putting a child through college at the different level of schools available, from an elite private university to a large top-tier state school, for example USC and UCLA here in California, to a smaller state school.

An elite private school can cost a family from $50K to $60K per year for all expenses: tuition, books, and day-to-day living expenses.

The large most-popular state schools will currently cost about $33K per year while a smaller state school will be around $25K annually. Those smaller less known schools in state systems tend to be the best value in education these days.

When asked how most family’s are able to afford these types of costs, Jeffrey’s unfortunate reply was that going into debt is the primary option in most cases, because the recent economy has negatively affected everyone’s savings.

This is potentially setting up another major setback in the economic recovery, as thousands of college graduates are and will soon be entering the workforce with huge amounts of student loan debt. The loans could be difficult to pay off when good-paying jobs are not immediately available for several years, if ever, to a considerable percentage of this group.

Part of the problem is that many university systems and colleges, both public and private, raised their tuition a few years ago when easy credit was available to families through home equity lines of credit.

It is not so easy for those schools to roll back their tuition rates nor is it easy for families to obtain lines of credit these days, so the situation is approaching critical mass, especially as more and more people are trying to obtain a degree as a means of adapting to the new needs within the evolving American workforce.

Jeffrey mentioned that many of the private universities, knowing they are in competition with the better state schools in a tight economy, offer a variety of scholarships that can help reduce the cost of attending an elite private school to about the same as a large state school.

Go to Radio Show Podcast ArchiveA good way to obtain a better understanding of all that you need to know is to attend one of Jeffrey’s highly-informative and free college planning seminars, where he discusses the various admissions processes and related financial issues, as well as how to locate and use existing databases about scholarships and other financial aid available.

When asked about California’s 529 college savings plan, Jeffrey stated his opinion tends to buck the conventional wisdom that favors it. Though the plan has some advantages and may be appropriate for some families, the aspects of the 529 Plan that hinder it are:

  • Limited funds
  • High fees
  • Limited changes to the plan allowed by the IRS
  • Expenses must be “qualified”
  • In some cases, the fund may add to total family assets, which may hinder its ability to acquire financial aide

When you are in a position to start planning for a child’s higher education, we believe a few good steps to take are:

  1. Consult with a professional, like Jeffrey Morrison, who is trained and experienced in college education financial matters and keeps up with the huge volume of ever-changing information about the schools and scholarships to consider.
  2. Establish a trust fund for saving money for college rather than the 529 Plan.
  3. If grandparents are contributing to the education savings, consider having them give the money directly to the parents rather than the student, to avoid any generation-skipping tax issues.

Troubled Children and Beneficiaries with Substance Dependencies

After our illuminating conversation with Mr. Morrison, we switched gears to discuss children who may not be headed for such a bright future, but who instead are “troubled,” for lack of a better phrase, which may include alcohol and/or other substance dependencies.

If you are concerned about how troubled children may handle an inheritance, denying  a child a share of a family’s estate will probably have negative effects on the family dynamics of the survivors.

An alternative worth considering is to set up a trust for a troubled child and to allow the trustee to use his or her discretion to determine when and how it is appropriate to make the funds in the trust available.

In these types of family situations, it may be best for the trustee to be an objective third-party from outside of the family, but who has knowledge of the family’s history and circumstances.

For more information about the variety of tax credits, deductions and savings plans available to assist with the expense of higher education, visit the IRS Tax Benefits for Education Information Center.

If you missed the original broadcast of this show, you can listen to a podcast by directly streaming or downloading the MP3 file in our Radio Show Archive.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

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