And there are several ways to do it. The right choice depends on how much control you want, how much you plan to give, and whether the funds should cover just college or broader needs. Setting aside money for a grandchild's schooling is one of the most common reasons families set up a trust.
529 College Savings Plans
The simplest option is a 529 college savings plan. Money grows tax-free. Withdrawals for qualified costs like tuition, room and board, and books are also tax-free. The tax perks make 529 plans one of the best ways to save for school.
You can put in up to the yearly gift tax limit per child each year. A special rule also lets you front-load up to five years of gifts in a single year. You keep control as the account owner. You can change who gets the funds to another family member at any time.
The main limit is that 529 plans are built for school costs. Taking money out for other uses triggers taxes and a 10% penalty on earnings.
Education Trusts
Want more control over how and when the money is used? Think about a dedicated trust for school costs. Unlike a 529 plan, a trust lets you set specific rules. You can limit payouts to tuition only. Or you can expand them to cover living costs, study-abroad trips, graduate school, or trade programs. You pick the trustee who manages the funds and approves each payment.
A trust for school costs does not offer the same tax-free growth as a 529 plan. Trust income is taxed at higher rates once it passes a low bar. But the control often outweighs the tax cost for families making larger gifts or wanting precise say in how money is spent.
Crummey Trusts and Gift Tax Planning
A Crummey trust is a type of trust that cannot be changed. It makes your gifts count as present gifts for tax purposes. This makes them eligible for the yearly gift tax limit. The trust gives the named person a short window to take out each gift. That window meets the IRS rule, even though the money is meant to stay in the trust for later use.
This setup works well when you want to make large gifts over time. It keeps the funds out of your taxable estate. You can write the trust to focus on school costs or allow for other uses too.
Combining Approaches
Many grandparents use more than one tool. A 529 plan handles the simple, tax-smart savings. A trust covers cases where the 529 plan falls short. Think paying for a gap year, funding a private high school, or helping a grandchild who picks a different path. Using both gives you freedom without losing the tax perks of either.
Choosing the Right Approach
For most families, a 529 plan is the simplest starting point. It is easy to set up, offers strong tax perks, and does not need ongoing trust work. If your goals are more detailed, if you are giving large sums, or if you want rules on how the funds are used, a trust gives you that control.
An estate planning attorney can help you weigh your options, draft the right trust, and make sure your plan fits your family's needs. The best time to start is while the grandchildren are young. The sooner you begin, the more time the money has to grow.