Q: I don't have any children but I have some wonderful grandnieces and grandnephews. I send a check to the ones in college each semester to help out with expenses. However, some of them are much too young and I worry that I won't be available to help them out when it is their turn. How do I set up a scholarship in my estate plan to help out after I'm gone?
A: First off, let me tell you how great it is that you are helping out with your loved one's education. I'm sure your generosity is appreciated.
You used the word scholarship in your email. If you are speaking about setting up an actual scholarship fund, you are talking about some sophisticated and costly legal works. Private foundations can get messy and are often cost prohibitive. If you are thinking of setting up an actual scholarship fund, I strongly suggest that you contact one of the local community foundations. Our area is blessed to have several good ones and they are equipped to assist you in establishing a scholarship fund and its management.
What I suspect is that you actually want to set up a trust fund in your estate plan to help out with educational expenses. Establishing such an educational trust can be pretty easily accomplished in a will or living trust, but you have to make some decisions first.
The first decision is do you want to set up a pot trust or individual trusts? A pot trust is essentially one trust that money is dumped into and all beneficiaries can draw from according to its terms. Personally, I'm not a fan of pot trusts because you run the risk of all the funds being used up before younger beneficiaries can start drawing from the trust. Costs can also vary drastically and if one student goes to Notre Dame and one to Indiana University Northwest, the Domer will likely use more funds than the IU Northwest student.
Individual trusts usually offer more flexibility. You can determine the amount funded into each trust and even set individual terms. The terms can determine what the funds can be used for. Remember that college is lot more than just tuition. You've got room and board, books, fees, travel expenses and one of those iPads that the kids can't seem to put down. You also need to decide what happens to the funds if they aren't used up of if your loved ones doesn't go to college at all. Do you want him to have the funds if he enlists in the service or if he joins the work force?
I love the idea that you want to plan for your loved ones education. Whatever the terms you decide upon, a good attorney will get it accomplished. Just give your goals a lot of thought and be prepared to answer a lot of questions. Leave the rest up to your attorney.
One final thought is to consider establishing a 529 plan or incorporating one into your estate plan. Indiana's CollegeChoice529 even offers an Indian tax credit of up to $1,000 per year for contributions. 529 plans are a great way to help out with college costs and may be an option also.