Planning for Education Expenses 

Early planning for your children’s and grandchildren’s education can help you cover costs efficiently while maximizing tax benefits. 

Options for Education Savings 

A range of strategies offers flexibility when saving for a child’s or grandchild’s education. 

In 2025, you can give up to $19,000 per beneficiary annually ($38,000 for married couples) without incurring gift tax or using your lifetime exemption. This annual gift tax exclusion applies regardless of how the gift is made—directly to the beneficiary, through a custodial account, a trust, or a 529 college savings plan. 

Tuition payments made directly to an educational institution are not subject to gift tax and do not count toward your lifetime exemption or annual exclusion. 

Prepaying Tuition 

Many K–12 private schools and some colleges allow tuition prepayment, which can be useful for grandparents looking to fund education while ensuring their contributions are utilized. However, prepaid tuition may be lost if a student transfers schools. 

Financial Aid Considerations 

The way education funds are structured can impact financial aid eligibility. Assets owned by a child (e.g., custodial accounts) reduce eligibility more than those owned by a parent. Grandparent- or trust-owned assets may not count at all. 

A child’s income has the most significant effect on need-based aid. Trust distributions are typically treated as the child’s income, even when paid directly to a school. As of December 2023, FAFSA does not ask about grandparent-owned 529 plan distributions, but it’s advisable to review FAFSA rules or consult a financial aid expert to confirm potential impacts. 

Education Savings Options 

Crummey Trust 

  • Allows a beneficiary to withdraw contributions within a set period, usually 30–45 days (“Crummey” power). 

  • Beyond this period, assets remain in trust and are distributed according to trust terms. 

  • Parents can exercise Crummey powers on behalf of minors. 

UTMA or UGMA (Custodial) Account 

  • Assets are irrevocably given to a minor, with an adult custodian managing them until the child reaches the legal age (18–21, or 25 in some states). 

  • Upon reaching adulthood, the beneficiary gains full control. 

  • If a contributor is also the custodian, the account may be included in the contributor’s taxable estate. 

529 College Savings Plan 

  • Contributors maintain control over investments and distributions. 

  • Some states offer tax deductions for contributions. 

  • Investments grow tax-free, and withdrawals for qualified education expenses are not taxed. 

  • Can be used for college, graduate school, and up to $10,000 per year for K–12 tuition. 

  • Non-education withdrawals are subject to taxes and a 10% penalty. 

Minority Trust 

  • The minor must have the right to withdraw assets at age 21, or assets must pass to their estate if they pass away before then. 

  • If the right is not exercised, assets remain in trust under the established terms. 

  • Trust assets must be used for the minor’s benefit. 

Comparing Strategies 

Example: Two Grandparents 

By combining direct tuition payments and 529 plan contributions, grandparents fund education while reducing estate taxes: 

  • Direct tuition payments: $10,000 per grandchild x 3 = $30,000 (not subject to gift tax). 

  • 529 plan contributions: $34,000 per grandchild x 3 = $102,000 (tax-advantaged savings). 

Example: Two Parents 

Parents can transfer wealth and save for education by: 

  • Contributing $10,000 annually to a UTMA account for each child (a taxable gift). 

  • Stopping contributions when an account reaches $100,000. 

The Bottom Line 

Education funding strategies vary, and the best approach depends on your financial goals. Whether you opt for direct tuition payments, a 529 plan, a custodial account, or a combination of these, careful planning can optimize tax benefits and ensure a solid financial foundation for future generations. Seeking advice from tax and legal professionals can help tailor a strategy that aligns with your overall estate and financial plans. 

 

"Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only." 

Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan’s official statement and read it carefully. The official statement contains more complete information including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state’s plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the sate level may vary.