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How can you help fund your heirs' education?

One of the goals that many people have when developing their estate plan is to provide money for the educational needs of their children, grandchildren and possibly even future generations. Often, this is accomplished by setting up one or more educational trusts.

There are two key types of educational trusts: individual and pot. Individual trusts, as the name suggests, are set up for a specific person's education. Pot trusts are intended to be used by multiple people.

It may seem simpler to set up one pot trust. However, these can be inherently unfair. One or more beneficiaries may use it up before the others reach college-age. One may choose an expensive private college, leaving the others barely enough to pay state school expenses.

If you set up individual trusts -- one for each grandchild, for example -- you need to determine whether to fund them equally. That may seem fair. However, what if your granddaughter grows up to have dreams of an Ivy League college education followed by medical school (and the ambition to achieve those dreams)? Meanwhile, your grandson wants to become an apprentice builder and make his living building homes for the poor? He doesn't need the same amount of money.

That brings up another issue. Often, people who set up educational trusts have specific ideas about how they should be used. They may view "education" in terms of a four-year college. However, what if one of the beneficiaries would rather use the money to study art in Italy? Is that any less of an educational experience?

One financial professional says, "One of the biggest mistakes is trying to be too specific about education." She says, "I encourage [clients] to make it broad." Legal and financial experts recommend leaving room in educational trusts for unexpected situations.

You may not need a trust to provide for your heirs' education. Programs like 529 savings plans let you invest money each year for educational needs. However, there are annual limits on contributions before they're considered gifts that are taxable. The Tennessee program, TNStars, offers tax advantages as long as the funds are used for "qualified higher education expenses."

It's wise to discuss your plans to set aside money for your heirs' education with your estate planning attorney. They can help you make the decisions that will help you best accomplish those goals.

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