How to Set Up a College Trust Fund

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The most popular and successful type of trust fund for saving for college is a 529 Plan. This plan allows you to set aside money for your children's future education and the investment grows in the trust tax-free. This fund is not subject to a gift tax because it is considered a non-taxable gift (see References). Also, a generation-skipping tax can be applied with the advantage of being used for your grandchildren, who'd have a tax-free exemption on the trust when their parent dies. 529 Plans are administered by each state, however, there may be other state plans for college funds that may interest you more (see Resources). For the lowest rates, you'll want to consider several steps for setting up a college trust fund using the 529 Plan.

How to Set Up a College Trust Fund

Start budgeting your expenses before setting up a trust fund. Determine how much money you'll be able to invest both monthly and annually. Use this information to have your investor calculate your money over time for you, if you don't already know how to.

Choose a 529 Plan that is in-state and best suits your needs. Try to find a plan that has a 1 percent federal fund rate, which is the interest rate that banks charge each other for loans.

Determine if you want a mix of stocks and bonds with your trusts. Choose the plan that best meets your child's age. Some plans may include more intense stipulations for older children and more convenient plans for younger children. Decide how long you will generally want your trust fund to last.

Start your trust fund at the bank you regularly use and plan to stay with. Get to know your investment banker and show him that you have researched your state's 529 Plans. Sign the appropriate paper work once you've decided on the right plan for you.

Check annually to make sure your investments are where they need to be. Your state's provider might change your plan and you'll need to keep track of your current plan.

Withdraw from your 529 trust when it's time for your child to go to college. Fill out the appropriate form to have the money drawn directly from the trust to his or her college, if you desire.

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