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With education costs soaring to all time highs, making tuition payments for grandchildren and others can save lots of money in gift and estate taxes down the road – even if the donor isn’t alive once the tuition money is really used.

Through some background, the tax laws exempt tuition payments by grandparents or others from any gift taxes, provided certain requirements are met. First, the sole educational costs that are gift-tax free are tuition costs. The price of room and board, books, and other educational expenses are not exempt.

Second, the tuition costs should be paid right to an educational organization that “normally maintains a regular faculty and curriculum and normally has a regularly tutors online math  enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” Notice that there’s no requirement that the tuition costs be paid to a college or university. In reality, tuition payments for nursery school, private elementary school, and private high school may also qualify. It’s possible, too, that tuition payments for part-time courses, such as for instance dance, theater, music, cullinary arts, and the like may also qualify for the gift tax exemption.

So, how is this such much? In the initial place, these tuition payments are not treated as taxable gifts, which means you don’t have to bother about having  them come underneath the annual gift tax exclusion. In reality, you possibly can make tuition payments for your grandchildren or others and still give all of them the annual exclusion amount ($12,000 for 2006) as a birthday gift or whatever.

Second, if your estate is big enough to bother about federal estate taxes (currently in excess of $2 million, $4 million for a couple), then the quantity of the tuition payments is likely to be excluded from your own estate upon your death. Put simply, your tuition payments won’t be susceptible to a gift tax once the payments are made, nor will they be susceptible to an estate tax upon your death. In addition, they’ll not be susceptible to any generation-skipping taxes (GST) upon your death

That’s pretty good deal by itself, but here’s an added bonus. On July 9, 1999, the Internal Revenue Service issued Technical Advice Memorandum 199941013 stating that prepayment of tuition costs was also exempt from gift taxes under IRC Section 2503(3)(2). In that particular case, a set of grandparents had made payments to a personal school to cover tuitiion costs because of their two grandchildren from pre-school through grade 12. There was an agreement between the school and the grandparents indicating that the tuition payments would not be refundable even if the grandchildren failed to attend the school each of these years. The full total payments created by the grandparents amounted to over $181,000 over a two-year period.

Recently, the Internal Revenue Service issued a personal letter ruling that supports the Technical Advice Memorandum cited above. For the reason that case, the IRS told a taxpayer that prepayments of several years of tuition costs for his grandchildren would not be considered a gift.

While Technical Advice Memorandums and private letter rulings only apply to the taxpayer’s who request them, they’re an excellent indication of the IRS’ position on specific tax matters. Here, it appears fairly clear that prepayment of multiple years of tuition costs won’t be treated as a taxable gift by the IRS.

Now, let’s kind of put all of this into perspective. In the TAM discussed above, the grandparents pre-paid roughly $181,000 of tuition costs over a two-year period. The payments weren’t treated as taxable gifts and, since the amount of money was removed from their estate, it wasn’t susceptible to estate taxes upon their death. If the grandparents kept the amount of money until they died and then gave it with their grandchildren under their will, it could have experienced probate first, then would have been susceptible to a federal estate tax and then, possibly, a generation-skipping tax – all before it could be utilized by the grandchildren.

If the grandparents had a fairly large estate, say bigger than $4 million, then a estate taxes paid on that $181,000 will be roughly $83,260 (based upon a minimal tax rate of 46%). For the reason that case, prepaying the tuition costs resulted in an estate tax savings of roughly $83,260. Plus, the grandparents didn’t have to utilize up their annual gift-tax exclusion to have the estate tax savings.