With college tuition coming due, families should consider tax efficient ways to pay for these expenses. Grandparents who wish to help their children with tuition costs can take advantage of some special gift tax breaks.
Grandparents have the usual annual present interest gift tax exclusion (now $15,000) and a lifetime exclusion (now $10,580,000). When a spouse joins in the gift (the called “spousal joinder”), these amounts double.
But these are not the only tax breaks available to a grandparent who wants to help the family. In addition, grandparents have an unlimited gift tax exemption for amounts paid for tuition. By using this special educational exclusion, such payments do not count against the annual gift tax or lifetime exclusions.
Here are the basic rules to qualifying these gifts for such unlimited educational exemption:
This exclusion from the gift tax for gifts of tuition is unlimited in amount. However, the scope of the exclusion applies to tuition only.
There is no exclusion for amounts paid for the following:
See Treasury Regulations 25.2503-6(b)(2) for more details.
The gift tax is not imposed on amounts paid as tuition for a student to a qualifying domestic or foreign educational organization for the education or training of such person. See Code Section 2503(e)(1) and (2)(A).
Tuition payments for the student qualify where enrollment is part-time or full-time.
A qualifying educational organization is one which:
See Code Section 170(b)(1)(A)(ii) and Treasury Regulation 25.2503-6(b)(2).
The tuition payment must be made directly to the educational organization to qualify for this exclusion.
Neither a payment to the student for delivery to the organization nor a payment to a trust for the student’s benefit for delivery to the educational organization will qualify for this exclusion. See Treasury Regulation 25.2503-6(b)(2) and (c) (Example 1).
Advance payments for future school years, made directly to a private school and used exclusively for the tuition expenses of designated students were excludable gifts where the payments were nonrefundable and the school would keep the funds if the children ceased to attend the school. TAM 199941013, PLR 200602002.
Prepayment of many years of private school tuition for a young child occurred in both cases. Since anything can happen with young children care should be exercised before making such a large prepayment.
This educational exclusion is permitted without regard to the relationship between the donor (person making the gift) and the donee (recipient of the gift).
Recipients (donees) need not be a dependent of the donor or even related to the donor.
This exclusion does not use up the following other gift tax exclusions available to the donor:
1. Annual present interest gift tax exclusion of $15,000, and
2. Lifetime gift tax exclusion of $10,580,000
For more on gift giving readers can check out Gift Giving: A Way To Save Estate, Gift and Income Taxes, Gift Tax Guide and Gifting Shares of Stock In A Bad Economy
No gift tax return (Form 709) needs filing where the only gift during the tax year qualifies for the tuition gift tax exemption.
Contributions to a Qualified State Tuition Program (a Section 529 plan) do not qualify for this educational expense exemption. See Code Section 529(c)(2)(A)(ii).
But a contribution to a Section 529 plan qualifies as a completed gift of a present interest that is eligible for the gift tax annual exclusion of $15,000. If the spouse joins in the gift the exclusion would be $30,000. For more on this topic please read Section 529 Plans: Gift Tax Rules.
This exclusion offers a very powerful tool for overall estate and tax planning for families. Donors should consider it as part of a family’s overall estate and gift tax strategies. Although not discussed, state inheritance taxes should be considered as part of this tax saving strategy.
Sit down with your experienced and skilled estate planning attorney or reach out to us before doing anything to make sure this planning tool is right for your specific situation and your overall estate plan.
Hiring Steven was quite possibly the best decision of my life! Steven took the time to hear every single one of my concerns and address them in an extremely clear, concise and thorough manner. He guided me through the notoriously complicated and stressful process of probate with the utmost of compassion and dedication. Thank you Steven!
I highly recommend Steven J. Fromm for all your estate and tax planning needs. He has the most complete and thorough knowledge of current as well as pending federal, state, and local tax codes of any professional that I have ever been involved with. His ability to totally sort out your current financial condition and relate it to a plan to minimize your tax liability and allow you to sleep at night is without equal. He is professional, timely, creative, and an advocate for your needs, whether its personal or business. You can be assured that you will be well taken care of, with cutting edge/ sound financial and tax advice by Steven J. Fromm.
I have always found Steve to be very responsive, accurate and creative in legal matters presented to him. He demonstrates a good business sense. We have collaborated on several highly technical issues over the years. I look forward to our continuing relationship.
Steven has been instrumental in helping my partner and I to create a secure and satisfying estate plan, which meets or exceeds all of our wishes and contains contingencies for everything from medical issues to wealth management and living wills. In this process, Steven has also become a friend. If you need Estate Planning, Tax Advice, a Will or a trust, etc., we highly recommend Steven Fromm, Esquire. He will listen and be sensitive to your unique situation.
Steve is an excellent attorney who has provided help for my family personally for business, tax, and other services for many years. He is extremely knowledgeable and thorough, and is extremely good at explaining legal concepts to me in clear terms understandable to a non-attorney. It is difficult to pick only three attributes above, since Steve’s work meets most if not all of the attributes above.
Steve is an excellent corporate attorney who has a deep understanding of corporate law, taxes and estate planning. He’s been extremely helpful to me in keeping my many companies and business ventures organized, focused and squeaky clean. He’s very strong in estate planning and wealth preservation as well. Finally, his follow through is air tight and utterly dependable.
Steven is a trusted adviser. We depend on him for so many things. He is patient, listens to our needs and makes excellent suggestions. He is extremely talented. We value his advice and have recommended him unhesitatingly to friends and family.
Steve Fromm is a superb lawyer and I highly recommend him! After a terrible experience with a previous lawyer concerning an estate administration, I entered his office feeling very deflated, confused and discouraged. However, I left his office feeling enthusiastic and eager to get down to business. My situation was very unique, I needed his expertise for an array of things and Steve was able to address all of my needs. With a limited timeframe and an extreme amount of obstacles to overcome he worked meticulously, diligently and accomplished extraordinary results. His professionalism is incomparable and I am forever grateful.