Planning with Prepaid Tuition
A grandparent wishing to insure a quality education for his or her young grandchildren may wish to pay tuition for the grandchildren to attend private schools. In doing so, the grandparent must be wary of possible gift taxes and generation skipping transfers taxes.
For example, assume a grantor settles a trust with assets sufficient to pay for grandchild’s private school tuition for grades 1-12. The transfer to the trust would be subject to gift taxes in that it is a transfer in excess of the annual gift exclusion (currently $13,000 in 2009). Furthermore, as a transfer to a “skip” person (the grandchild is more than one generation removed from the grantor), the generation skipping tax would be imposed under Section 2601 of the Internal Revenue Code (the “IRC”).
PLR 200602202 illustrates how careful planning avoids this result. In PLR 200602002, a grandparent (or anyone, for that matter) entered into a written agreement directly with a qualified educational institution for the prepayment of multiple years’ tuition and thereby avoided the gift and generation skipping taxes.
There are some important aspects to consider prior to entering into these agreements. For example, the prepayment must be nonrefundable, if a grandchild no longer attends that school, for whatever reason, the payments will be subject to forfeiture. This includes the situation where a family relocates or the grandchild needs or desires to attend an alternative school.
With the rising costs of tuition at all levels of education, an agreement to prepay tuition for a grandchild with a private school provides a unique opportunity to not only insure a quality education for a loved one, but to avoid unnecessary and potentially costly estate, gift and generation skipping taxes. This type of arrangement provides estate, gift and generation skipping tax advantages which a trust cannot.
If you would like further information regarding prepaid tuition arrangements, please give us a call.
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