Planning for a child’s or grandchild’s education is one of the most meaningful financial decisions families make. For years, 529 plans have been a popular tool for covering future college expenses, but they are not the only option. Families may also want to consider trusts, custodial accounts, or other strategies to ensure that educational funding aligns with their broader financial goals.
In this article, we review how 529 plans work, compare them with other methods such as trusts, and discuss the flexibility needed as more students explore nontraditional paths like trade schools and vocational programs.
529 Plans: A Familiar Option with Tax Advantages
A 529 plan is a tax-advantaged savings plan designed to encourage saving for education costs. Below are some key features.
Tax benefits:
Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses such as tuition, books, and housing.
Contribution limits:
While there are no annual contribution limits, contributions qualify for the federal annual gift tax exclusion, which is currently $19,000 per individual or $38,000 for married couples filing jointly as of October 2025. There is also a “superfunding” option that allows you to contribute five years’ worth of gifts at once. If considering a superfunding option, it is advisable to discuss the rules and options with your financial advisor and accountant.
Eligible institutions:
529 funds can be used for most U.S. colleges and universities, many vocational and trade schools, and even some international institutions.
What if your child does not attend a four-year college?
With today’s evolving education landscape, many students pursue apprenticeships, trade schools, or specialized certifications. The good news is that 529 plans can often cover these costs, provided the program is eligible. If the funds are not needed for education, new rules beginning in 2024 also allow limited rollovers of unused 529 assets into a Roth IRA for the beneficiary. This is an option worth exploring with your financial advisor.
Trusts: Greater Control and Flexibility
While 529s are straightforward, some families want more flexibility and control, particularly if they are funding education for multiple generations. That is where trusts come in. Below we cover different types of trusts for education funding.
Educational Trusts
- Created specifically to pay for tuition and related expenses.
- You can set rules for when and how funds are distributed, such as only for accredited schools or only for undergraduate studies.
Irrevocable Trusts
- Allow you to move assets out of your estate while earmarking them for education.
- Assets may grow outside your estate, helping reduce estate taxes.
Gift Trusts and the Annual Gift Tax Exclusion
- Just like 529s, you can use the annual gift tax exclusion to fund a trust.
- Some families prefer this approach because a trust offers more control than a 529 plan.
Grandparent Trusts
- Many grandparents want to help fund their grandchildren’s education. A trust allows them to give in a way that minimizes taxes while ensuring funds are used as intended.
Unlike 529 plans, which must be used for qualified education expenses to avoid taxes and penalties, trusts offer greater flexibility. Funds in a trust can be redirected if a beneficiary chooses a different path, and families can set specific conditions, timelines, or incentives for distributions. Trusts can also serve as a legacy tool, supporting multiple beneficiaries across generations.
While there are many benefits, it’s important to note that trusts involve legal complexity and administrative costs. They also require careful drafting to balance tax advantages with your intentions for the funds.
RELATED: Read about integrating estate planning into your financial plan.
Other Options to Consider
Besides 529s and trusts, families sometimes explore additional methods:
- Custodial Accounts (UGMA/UTMA): Assets are held in a child’s name, with an adult custodian managing them until the child reaches the age of majority. Unlike 529s, the child can use these funds for any purpose, not just education. However, custodial accounts may impact financial aid eligibility.
- Direct Tuition Payments: Tuition paid directly to an educational institution is not subject to gift tax, regardless of the amount. This can be a useful strategy for grandparents who want to make a significant contribution.
- Coverdell Education Savings Accounts (CESA): These accounts allow tax-free growth and withdrawals for qualified education expenses, including elementary and secondary school tuition. However, annual contributions are capped at $2,000 per beneficiary, and eligibility is subject to income limits.
Effective education planning can help families determine which combination of strategies best fits their goals and future needs.
Matching Funding Strategies to Education Paths
Not every student follows the traditional four-year college path. Many choose trade schools, community colleges, or specialized certifications instead. While 529 plans often cover these options, families may need a trust or alternative strategy if a program is ineligible. Unused 529 funds can also be transferred to another beneficiary, rolled into a Roth IRA within limits, or redirected toward other long-term goals with the help of a financial advisor.
Choosing the Right Path
Both 529 plans and trusts have their strengths, and in many cases, families may benefit from using a combination of them. The best strategy depends on factors such as:
- The number of children or grandchildren you are supporting
- Your estate planning goals
- The type of education the beneficiary may pursue
- Your tolerance for complexity and administrative costs
Whether you are a parent or grandparent, saving for a child’s education is an important financial goal, especially as tuition costs continue to rise. At Bill Few Associates, our Pittsburgh financial advisors can project education costs, recommend savings plans such as 529s, trusts, or CESAs, and build a strategy that aligns with your overall financial plan.
Ready to explore your education funding strategy? Contact us today to schedule a conversation with one of our experienced financial advisors.
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