Five Things to Consider When Making Educational Gifts to Students

By Alison J. Warden | Related Practice: Estate Planning & Administration

The gift of higher education is one of the most satisfying contributions that a person can provide to a loved one. While some gifts are planned years in advance (e.g., gifts to 529 plans or educational trusts), there are times when gifting to a student who is currently in college can help create a path to success that otherwise would not be possible. When planning such a gift, the following considerations are important to keep in mind:

1. Direct payments of tuition are gift-tax free. Tuition payments made directly to qualified institutions, including colleges and universities, are gift-tax free, no matter the payment size. This special treatment for tuition payments is not available for any other education-related expense. To qualify for this treatment, the check must be written by the donor directly to the institution. The funds cannot pass through the student or a trust.

2. Gifts for non-tuition needs can be made with annual exclusion gifts. If you wish to make gifts in excess of tuition, or solely for non-tuition needs, the annual exclusion amounts can be used. Under current law, an amount of $15,000 per recipient ($30,000 per recipient if you are a married couple) may be transferred to a recipient each year using the “annual exclusion,” and such amounts will not be subject to the gift tax. The annual exclusion amounts change periodically.

3. Gift tax returns are the donor’s responsibility. For any year in which a gift is made, a gift tax return may need to be filed. Generally, a gift tax return must be filed if annual exclusion amounts are exceeded, if annual exclusion gifts are “split” with a spouse, if gifts are made to a trust, if gifts are made of discounted or hard-to-value assets, or if gifts trigger the generation-skipping-transfer tax reporting requirements. Even if a return is required, under current law you will not owe gift tax unless you have gifted more than your lifetime exemption amount of $11.18 million ($22.36 million per married couple), not including annual exclusion gifts. Note that like the annual exclusion amount, these exemption amounts change periodically.

4. Recipients will owe no income tax on the gifts. A true gift is not treated as income to the recipient for state or federal income tax purposes. If the gift is of appreciated property, the recipient will owe tax on the capital gains when the property is later sold.

5. Gifts may jeopardize financial aid. If your student needs or is receiving financial aid, proceed with caution in making gifts while the student is in school. Gifts made outright or of tuition will be treated as “untaxed income” for purposes of the Free Application for Federal Student Aid (FAFSA) and can affect eligibility for aid in the next school year. Better options may be to contribute to a 529 plan if one has already been set up for the student (which may have more favorable financial aid treatment), to help pay off a student loan after the student graduates, or to explore other workarounds with the help of a competent advisor. 

If you are considering making a gift to benefit a loved one in college, it is important to structure the gift in a manner that is tax-efficient and works for the student, too. If you have any questions about gifts, please contact a member of the Stokes Lawrence Estate Planning Group.