Gift and Estate Planning Ideas for Paying for College
A primary concern for most people in putting together an estate plan is trying to make sure that their
descendents will have monies set aside for education. Whether it is making sure that there is money
available to provide a college education for one child or grandchild or trying to put something together to
insure educational opportunities for more than one generation of a family, taking the time put together a
plan will pay off in maximizing the amounts available in the most tax-advantaged manner.
The Unlimited Exclusion for Direct Tuition Payments - The direct payment by a parent or
grandparent of tuition for a child, grandchild, other family member or even an unrelated person is not
subject to federal or Tennessee gift tax, or generation skipping transfer tax. These payments qualify for
the gift tax exclusion as long as they are made directly to the educational institution for tuition. In other
words, to qualify for this exclusion the donor must directly pay the tuition to the school. A
reimbursement of the cost of tuition to the child's parent or to the child will not qualify. Payments for
room, board, books or living expenses at school do not qualify for the exclusion – only direct payments of
tuition qualify.
The great news is that this exclusion is unlimited in amount, it is in addition annual exclusion gifting
allowed by the federal government and Tennessee, and it does not reduce the donor's lifetime or estate tax
exemptions. [This exclusion also applies to the direct payment of necessary medical expenses - a topic to
be discussed in a future article.]
The simple math of this exclusion illustrates its power. For our assumptions let's assume that our donors
are grandparents with six (6) grandchildren, that half of them will go to public four-year institutions, that
the others will go to private colleges, and that four (4) of them will go on to graduate school. For costs
let's use $10,000 per year for public schools, $20,000 for private and $25,000 a year for three (3) years for
grad school. The total tuition in today's dollars would be $360,000 for undergraduate school and another
$300,000 for grad school - for a grand total of $660,000.
Since this exclusion is unlimited in amount and does not require the formalities of a trust, this method of
college funding should always be considered when putting together a plan for educating family members
and assisting friends.
Outright Gifts – Probably the most common planning technique for saving for college (other than a
savings or investment account established by a parent) is an outright gift to a child. Of course a child can
“do the wrong thing” with this type of gift, but somehow most of them are smart enough to know that
when mom or dad, a grandparent, or an aunt or uncle makes a deposit to their college savings account (or
buys them a savings bond) that the thing to do if they want to keep receiving this type of gift is to leave it
there until it is time to head off for college. The advantages to this type of planning are that of course it
qualifies as an annual exclusion for gift tax purposes and it that does not require anything more than the
establishment of an account in the child’s name. The downside is of course the potentiality that the child
make in fact do the wrong thing with the gifts.
Uniform Transfer to Minors Act – When trying to set assets aside for education in the future, other than
making an outright gift to the child for investment in his or her investment or bank account, a gift to a
custodian under the Uniform Transfers to Minors Act (“UTMA”) is probably the simplest approach.
[Note that some states use the Uniform Gifts to Minors Act (“UGMA”) which is similar but there are
differences between the two] The advantage to the UTMA over the outright gift is that the child will not
have the gifted assets available to fund his/her bad choices until the termination of the UTMA account.
An UTMA account can be funded with almost any type of property and by almost any source including
outright gifts and transfers from estates, trusts and guardianships. In making the gift and funding the
account the donor transfers the property to a donee as custodian under the UTMA. The selection of the
custodian is up to the donor who can even name himself/herself as custodian though that may have
adverse estate tax consequences if the donor dies before the termination of the account. During the term
of the account the custodian is allowed to make distributions to or for the benefit of the child including
payments of educational expenses.
One of the disadvantages to this approach as compared to the use of trusts is that an UTMA account has
to terminate at a relatively early age. Many states require the account to terminate at the age of twentyone (21) with any remaining assets distributed outright to the child. Tennessee allows the account to
continue until age twenty-five (25) if the transfer to the account specifically provides that age; however,
the use of age twenty-five (25) does have negative gift tax consequences in that no part of the gift will
qualify for the federal or Tennessee gift tax annual exclusion.
529 Plans – As discussed in detail elsewhere in this edition, 529 Plans have become a very popular way
to save for a child’s education and they do afford a degree of flexibility not typically available outside of
planning with trusts. However, on the gift tax side of these accounts is one important take away. In
funding a 529 Plan for an individual the donor is allowed to elect to front-load the account with an
amount equal to five (5) years worth of annual exclusion gifts. With a federal annual exclusion of
$13,000 this year that means up to $65,000 gift tax free this year. For a married couple, together that
would be $130,000. Of course you have to file a return to make the election, the election does use up
your annual exclusions for that donee ratably over the five years, and you need to take into account the
state gift tax consequences of the transfer (if any).
An additional tax advantage for the 529 Plan is that the earnings on the investments in the plan are
allowed to grow tax-free while the earnings in most other savings devices (including UTMAs and most
trusts) pay income tax on earnings on a current basis.
Planning for College with Trusts – Trusts take the funding of education a step further than outright
gifts, UTMA accounts and 529 Plans, Trusts provide much greater planning flexibility and typically
provide benefits including the funding of education and much more. Trusts which specifically provide for
educational benefits of a minor –

Do not have to terminate at an age determined by the state (age 21 under the UTMA);

Can provide educational and other benefits for a group of beneficiaries such as all of a person’s
children or grandchildren;

Can be structured to qualify gifts to the trust as annual exclusion gifts; and

Provide asset protection for some set period of a beneficiary’s life – or for a whole lifetime
Given the great flexibility of trusts there are several types that can be used. If you are interested you
should set down with an advisor and discuss your options for funding the education of a child, a family of
children, or several generations of a family!
Conclusion - The above outlines the basic techniques usually discussed as gift and estate planning
techniques for education. Of course there are other techniques available (as mentioned elsewhere herein)
and in fact it could be that in your instance more than one of these should be selected. Our advice in this
type of planning is to:

Identify all of your objectives (which may include maximizing a child’s ability to qualify for
student financial aid);

Identify all available resources (including potential loans, scholarships and gifts from family);

Work with an advisor to make sure that you are maximizing your opportunities; and

Get started early!