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Maximizing Estate Tax Planning Through Unlimited, Direct Gifts of Tuition
Posted in Estate Planning

One of the most basic and important estate tax planning tools is making the most of “exclusions.” While many individuals are already aware and take advantage of the tax planning benefits of the “annual exclusion,” less are aware of another valuable exclusion: a qualified gift of tuition.

What are exclusions?

Exclusions are gifts that are not taxable, nor charged against the donor’s lifetime use of the exemption amount. This year’s federal gift tax law retained the annual exclusion, which has been set at $14,000 for 2013. This means that one may gift up to $14,000 to as many individuals as desired – children, grandchildren, spouses of relatives, and even unrelated third parties – without triggering any gift tax, using up any of the lifetime exemption, or even needing to file a gift tax return.

A “qualified gift of tuition” means that, in addition to, or instead of, making annual exclusion gifts, the donor can pay tuition expenses of the donee(s). There is no limit to the amount. The gift can be for tuition for university, or private high schools or primary schools (but not camps or day care facilities).

The fine print

To qualify, there is some fine print. The tuition exclusion applies only to tuition costs, and not to non-tuition expenses such as books, supplies, or room and board. Second, the tuition must be paid by the donor directly to the educational institution – not indirectly, such as a gift to the student who then pays the tuition. Gifts to reimburse for tuition paid previously also do not qualify. Nor may the tuition payments be routed by the donor through a trust.

In addition, to be a qualified educational institution, the school must meet certain basic requirements, like maintaining a regular faculty and curriculum. Any tuition gifts contemplated to unconventional institutions should be discussed in advance with a tax planner to determine qualification.

Thus, grandparents, for example, who pay for their grandchildren’s education are able to transfer what is potentially a significant amount of money to future generations, tax free. Gifts of tuition have the added benefit that, unlike a $14,000 cash gift made per the annual exclusion, the donor knows precisely how the money will be used. It's an important but often underutilized estate planning tool that not only reduces estate taxes, but in the process can substantially improve the education of the recipient of the gift.

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  • Partner

    Greg works with estate and wealth transfer and matrimonial law in the firm's Estate Planning Department and is also part of the Corporate Services Department. Among the legal services he provides for his clients are estate and gift ...

  • Partner

    Mike is a partner in Bingham Greenebaum Doll LLP’s Estate Planning Department. The Estate Planning Department seamlessly coordinates and executes a wide array of legal services that cater to the unique needs of high ...



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