Tax Break for Prepaid Tuition

Private letter rulings by the Internal Revenue Service are legally binding only on the party whose specific situation is addressed in the ruling, but they do tip the hand of the IRS as to how it will treat similar cases. A recent private letter ruling approved of a valuable technique for avoiding gift and estate taxes by prepaying any amount of tuition to an educational institution on behalf of an individual.

The Tax Code excludes the amount paid from either gift taxes or estate taxes as long as it is paid directly to an educational institution to be used exclusively for the payment of specified tuition costs for designated individuals. A similar Code provision gives the same treatment to prepaid medical expenses as long as they are paid directly to the health-care provider.

In this case, a grandmother was allowed to make a series of tax-free prepayments over two years of more than $163,000 in nonrefundable tuition for her two grandchildren's future attendance at a private school. The IRS underscored the importance of a direct payment to the institution. For example, a tuition payment would not be a "qualified transfer" where the money is first put into a trust, even one whose terms require that the funds only be used to pay tuition costs for designated individuals.

[ Assumption of Risk ] [ Digital Audio Recording ] [ The Domain Name Game ] [ Business Entity Basics ] [ Estate Planning ] [ Fraudulent Hiring ] [ Sexual Harassment in Employment ] [ FDIC Insurance Pitfalls ] [ No-Fault Breakup ] [ OSHA Telecommuting Rules ] [ Estate Planning ] [ The Great Pretender ] [ What Is Title Insurance? ] [ You May Not Already Be a Winner ]

RETURN TO NEWSLETTER TOC