An education trust fund is a type of trust established for the beneficiary’s educational expenses. The disbursements from the trust fund are allocated to the beneficiary according to the terms of the trust. Hence, the beneficiary will only receive the funds in the manner that is compliant to the grantor’s intent for the trust. If there is more than one beneficiary, the grantor can require the trustee to divide the trust assets, such as by percentage or whole amount, and disburse the funds accordingly to the beneficiaries.
An education trust fund may be created to pay income to the beneficiary. The trust fund disbursements are taxable to the beneficiary. Any income accumulated by the trust for the tax year but not distributed to the beneficiary is generally taxable to the trust. The principal amount in the trust is not taxable. However, the terms of the trust may establish whether the income earned by the trust is either taxed to the trust or the beneficiaries. This income may be in the form of capital gains, interest, ordinary income or dividends.
Income Distribution Deduction
The trust can deduct that amount that is disbursed to the beneficiary minus any tax-exempt income under the income distribution deduction. The beneficiary must report this amount on the tax return as taxable income.
Disbursements to Institutions
Any income paid on behalf of the beneficiary is also taxable to the beneficiary and will be taxed according to the beneficiary’s income tax rate. The trust document may be formed to allow the trust funds to be distributed to educational institutions, which may not be limited to post-secondary schools. The funds can be allocated to other educational institutions, such as trade schools, private schools or educational workshops. The terms of the trust can be worded to provide the trustee with discretion to decide what is considered educational purposes.
Creating the Trust
An education trust fund may be set up as a living trust where the distributions are made to the beneficiary or on behalf of the beneficiary while the grantor is alive. Otherwise, the grantor may establish a testamentary trust to take effect upon his death. If allowed by the trust document, the trustee may distribute the funds to the beneficiary for purposes in addition to education. The trust can end when a specific event occurs, such as when the beneficiary finishes school or the trust assets are depleted.
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