Utilizing 529 Plans and Direct Payments to Educational Institutions for Estate Planning

Higher education not only offers a great way to better position your children and grandchildren for future success, but the associated tuition costs provide a practical opportunity to utilize unique estate planning techniques through gifting. For example, by contributing to a 529 plan (more formally known as a “qualified tuition plan”) or by paying educational expenses directly to an institution, you can successfully reduce your taxable estate. The specific exceptions to annual exclusion gift limits will be further broken down below.  

Annual Exclusion Gift Limits 

In 2024 any gift from one individual to someone other than their spouse is limited to $18,000 per recipient per year. Any amount given above that limit is considered a “taxable gift” and the individual responsible for the gift must file a gift tax return (Form 709) with the IRS.¹ However, as previously mentioned, there are exceptions which enable family members (including grandparents) to contribute more than the annual gift exclusion limit in one calendar year to support a loved one’s education. It is also worth noting that even if you exceed the annual gifting limit and must file a gift tax return (Form 709), you will likely not owe taxes as long as you are under the $13.61 million lifetime estate exemption.²  

529 Plans and the 5-Year Rule  

Additionally, you can further reduce your estate by contributing to a 529 plan. The IRS allows a taxpayer to gift up to five years’ worth of annual exclusion gifts (5 x $18,000 = $90,000 in 2024) in one calendar year.³ This means a grandparent could contribute $90,000 to a grandchild’s 529 plan without exceeding the annual exclusion limit, provided no other gifts are made to that grandchild over the next five years. This is called the “5-year gift tax averaging” and allows contributors to gift more than the annual exclusion in one year.  

Direct Payments to Educational Institutions or Medical Providers  

Another effective estate planning strategy allows payments directly to an educational or medical provider on behalf of the recipient. Such payments are not subject to the annual gift tax exclusion. For example, if a grandparent pays a grandchild’s college tuition directly to the university, this payment does not count towards the $18,000 annual gift exclusion and does not require filing a gift tax return. The same strategy applies when paying for medical expenses. Expenditures such as medical insurance, prescriptions, and payments for general medical care can be paid directly without counting towards the annual exclusion. 

It's crucial to ensure payments are made directly to the institution or medical provider and not to the student or individual, as payments made directly to the student or individual are considered taxable gifts. It is important to keep detailed records of these transactions to provide proof to the IRS if needed. 

Impact on Financial Aid 

We encourage you to consult your financial planner when considering these gifting strategies. The 529 contributions can affect your child or grandchild’s financial aid, particularly with need-based aid. Contributions to a 529 plan are considered assets of the account owner (usually the parent or grandparent) and can affect the student’s eligibility for financial aid. Direct payments to educational institutions, however, are not considered the student’s income and do not affect financial aid eligibility.⁴ 

Conclusion 

When applying the gifting strategies highlighted above, you can make a far-reaching impact by both supporting your loved ones with education and healthcare costs while making wise estate planning decisions for your future. If you are curious about the gifting and estate planning strategies mentioned, please reach out to your financial planner at Apella Wealth with any questions.

Sources

1 IRS provides tax inflation adjustments for tax year 2024 | Internal Revenue Service

2 Gift Tax 2024: How It Works, Limits and Who Pays | Kiplinger

3 529 Contribution Limits 2024: What You Need to Know Before You Invest (savingforcollege.com)

4 Direct Payment of Medical Expenses and Tuition as an Exception to the Gift Tax (actec.org)

Disclosures:

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