Paying for Grandchildren’s College Tuition

The Tax Relief Act of 2010 makes it easier for grandparents to pay for their grandchildren’s education. The federal gift tax exemption is $5 million, and so is the GST tax exemption. Grandparents can still pay for college tuition without incurring any tax consequences by paying it directly to the school, but this may not work for some grandparents whose grandchildren won’t attend college until after the grandparents die.

Some grandparents are setting up “pot trusts” that name all grandchildren as beneficiaries. Grandparents can pay the income tax bill while alive, making an additional tax-free gift to the grandchildren. One problem with irrevocable trusts, however, is that the grandchildren will have to report the trust on their financial aid forms, which could kill their chances of receiving financial aid.

Another option is to contribute to a 529 plan. Assets that grandparents contribute to a 529 are no longer a part of their estate, and the grandchildren won’t have to report the account on their federal aid forms. If the withdrawals are used for qualified college expenses, they are generally tax-free.

See Kelly Greene, Paying Grandkids’ College Bill, W.S.J., Apr. 30, 2011.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.