by Stanley Vasiliadis

Jim and Betty so adored their young grandchildren. Establishing a fund to financially assist in paying for their college education seemed like just the right thing to do. Of course, this is a common scenario. “Section 529” plans are perhaps the most popular vehicle to accomplish this goal. Under Section 529 of the Internal Revenue Code, an individual or couple can set aside cash contributions for the future educational expenses of a designated beneficiary. Although contributions are not tax deductible, earnings and distributions are tax-free. These plans are especially attractive for avoiding federal gift and estate taxes, provided the timing and amount of contributions are within specified limits.

Unfortunately, in the case of Jim and Betty, the money in their 529 plan never got to be used for the intended purpose. Jim died, Betty later entered a nursing home, and the 529 fund had to be liquidated and spent down in order for Betty to receive Medicaid benefits to pay for her care. However, had they funded a Minors Grantor Trust (MGT), the money would have been protected for the grandchildren. Unlike a 529 plan, income earned by an MGT is not tax exempt. But an MGT has some unique advantages in addition to protection against nursing home costs:

  • Flexibility.  There are no restrictions on the timing and amount of contributions and distributions, the purposes for which the money is used, or who may benefit.
  • Creditor Protection.  Assets held in an MGT are shielded from claims of possible future creditors of contributors and beneficiaries.
  • Income tax benefits.  Income, deductions and credits pass through from the trust to the contributors on their personal income tax returns.
  • Financial Aid.  Assets in an MGT do not adversely impact eligibility for scholarships and financial aid.

Is an MGT right for you? Give Vasiliadis & Associates a call, and we’ll make sure that your grandkids get the college money that you set aside for them.