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Many grandparents help their cashstrapped children with high educational expenses by paying their grandchildren's tuition directly to the schools. These payments qualify for the unlimited gift tax tuition exclusion [IRC section 2503(e)] and are gift tax-free in addition to annual exclusion gifts.
Grandparents or other older donors with short life expectancies often wish to get more out of their estate than just one year's tuition without any gift tax. One way is by making gifts to individuals through the college savings plans that are available in many states. These gifts, however, generally are subject to the $10,000 per person per year exclusion limit. They do not qualify for the unlimited tuition exclusion because the payments are not made directly to an educational institution. They also cannot be used to pay for elementary or high school tuition.
Another method of paying more than one year's tuition is to fund a trust, the terms of...