Can I contribute to my kid's education IRA with our family trust?

[infoquest1]

I have two teens. Can I contribute say 2000 each to their accounts using our family trust since we exceed the IRS income limit?

IRS Topic No. 310 Coverdell Education Savings Accounts says (quote) "Organizations, such as corporations and trusts can also contribute regardless of their adjusted gross income." I am wondering if our own family trust is included or not in the said 'trusts' here.

Thanks,

Ray

[RayW7 · Accepted solution]

Yes, according to IRS Topic No. 310 Coverdell Education Savings Accounts

Organizations, such as corporations and trusts can also contribute regardless of their adjusted gross income. 

You may be able to contribute to a Coverdell ESA to finance the beneficiary's qualified education expenses.

Contributions must be made in cash, and they're not deductible. Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions.

Contributors must contribute by the due date of their tax return (not including extensions). There's no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.

[infoquest1]

Hi @RayW7 

Thanks for your answer.

How do I show to IRS that such contributions come from our family trust, which is a living entity?

I heard about another way to make contributions without tax penalty is to gift kids and they can make contributions themselves. Does it sound right to you?

Thanks,

Ray

[RayW7]

You might consider the Gift Tax...

Tax Guidelines About Gifting-

You can give up to the annual exclusion amount ($15,000 in 2020) to any number of people every year, without facing any gift taxes. Recipients generally never owe income tax on the gifts.

The gift tax is perhaps the most misunderstood of all taxes. When it comes into play, this tax is owed by the giver of the gift, not the recipient. You probably have never paid it and probably will never have to. The law completely ignores 2020 gifts of up to $15,000 per person, per year, that you give to any number of individuals. (You and your spouse together can can make joint gifts up to $30,000 per person, per year to any number of individuals.)

The $15,000 figure is the amount of the current gift tax exclusion (in 2020), meaning that any person who gives away $15,000 or less to any one individual in one particular year does not have to report the gift to the IRS, and you can give this amount to as many people as you like. If you give away more than $15,000 to any one person in a single year (other than your spouse), you will have to file a gift tax return. However, this does not necessarily mean you’ll pay a gift tax. You’ll have to pay a tax only if your reportable gifts total more than $11.58 million (in 2020) during your lifetime.

[infoquest1]

Hi @RayW7 

Understood. All I care about is to fund my kids' education IRAs to IRS limit each year with no tax penalty and as little paperwork as possible. Given $4000/max each year, it seems gift is the better way to achieve this. Make sense?

Thanks,

Ray

[PattiF]

Yes, that is a great way to fund your children's education funds. Since the amount does not require that a Gift Tax form be prepared, it will be the best way to make a contribution given your financial situation.