The answer depends first on your financial objectives and then on other factors that will influence those objectives. Trusts are frequently used to minimize estate taxes, get professional management of assets, and control funds while providing for minor children. If these features correspond with your overall financial strategy, a trust can be an efficient way to fund a college education.
However, trusts have certain disadvantages. Generally, you need a significant lump sum to initiate a trust. Also, trusts are often expensive to maintain (e.g., a trust must file a separate tax return). Tax consequences, attorney fees, and the possibility that your child’s eligibility for financial aid will be negatively impacted may also be drawbacks to this type of funding.
Two types of trusts that can be used for college education funding are a Section 2503(c) trust and a Crummey trust. The Section 2503(c) trust controls funds like a classic trust: A trustee manages the funds for the child’s benefit, and at age 21, the child receives the remaining principal and income. With a Crummey trust, the beneficiary can withdraw periodic contributions made to the trust for a set period of time after they’re made. It is also unique in that it allows multiple beneficiaries and does not mandate distribution at age 21.