3 Strategies For Funding Education For The Next Generation


A 2018 Forbes article reported that the cost of college education is increasing almost eight times faster than wages in the United States. As these numbers continue to rise, it’s not surprising that many people are looking for assistance to defray education-related expenses. If you have adult children, partially funding your grandchildren’s education can be a great way to financially assist them without triggering the gift tax.

Gifting a large sum of money can incur a 40% gift tax. There’s also a generation-skipping transfer (GST) tax of 40% for any gift made directly to your grandchildren in excess of $11.4 million ($22.8 million for married couples, in 2019). Fortunately, there are strategies available that can allow you to help your children financially while avoiding a hefty tax bill.

Consider these three strategies for funding the next generation’s education:

Pay Their Costs Directly

You can pay your family’s education expenses without limit so long as you write the check directly to the educational institution—and the good news is, it won’t count towards your annual exclusion or lifetime exemption. In addition to being able to spend as much as you wish without incurring the gift or GST tax, paying these costs directly gives you the flexibility to pay for any level of education from preschool to graduate school. You also have the option to pay on an annual basis or prepay depending on your financial circumstances and preference.

Make Annual Tax-Free Gifts

In 2019, the annual exclusion is $15,000 per donee (double this amount for married couples). In other words, you can gift up to $15,000 per individual without triggering the gift tax. Anything above that limit will be subject to taxation.

There are also several options to help fund education expenses while staying within the annual exclusion amount. You can provide for future educational expenses by funding a Section 529 education savings plan—a tax-deferred savings and investment account that allows parents and grandparents to save for the next generation’s educational expenses. Another option is to fund a Uniform Transfer to Minors Act (UTMA) account, an IRC Section 2503(c) Trust or a Crummey Trust, which have similar benefits but allow you to maintain more control over your gifted assets.

Lend Them Money

Rather than make an outright gift to your children or grandchildren, you can lend your adult children money to help them pay education-related expenses. Lending money to family members requires a few formalities—for example, you are required to charge a minimum interest rate, which is set each month by the U.S. Treasury. Still, this rate is much more favorable than a government or bank loan. In addition, other loan terms are often more For example, if your children are financially dependent on you, it’s usually wise to make sure your estate plan contains provisions such as life insurance to continue supporting them into the future.

To learn more, please read our white paper on the same topic, Supporting the Next Generation’s Education.

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