Options for Funding a Grandchild’s Education

Helping a grandchild pay for school can be a meaningful way to support their future while also giving grandparents an opportunity to pass on wealth in a tax-efficient way. Grandparents can contribute to education costs in several ways, including outright gifts, loans, or establishing a 529 plan. Choosing the right approach depends on a variety of factors, such as the type of educational expenses involved, the child’s age, and the grandparents’ overall financial situation. In this article, we’ll explore three options that offer both tax and estate planning advantages: making direct tuition payments, opening a 529 plan, and utilizing a minor’s trust.

Direct Payments to Qualified Educational Organizations

Tuition payments made directly to an accredited institution are not considered gifts for tax purposes. This allows you to fund a grandchild’s education without impacting your annual gift tax exclusion of $19,000 ($38,000 for married couples) per recipient in 2026. It also avoids any estate and gift tax or generation-skipping tax consequences.

Under Section 2503(e) of the Internal Revenue Code, there is an unlimited gift tax exclusion for tuition payments made directly to an educational organization. These organizations include primary, secondary, preparatory, and high schools, as well as public and private colleges, universities, and qualified apprenticeship programs, provided they maintain a regular faculty, curriculum, and a regularly enrolled student body; tuition must be for full-time or part-time students. Non-tuition related expenses such as books and room and board are not permitted.

With college tuition costs sometimes exceeding $70,000 per year, direct tuition payments allow you to contribute large amounts annually to a grandchild’s education. This strategy also allows you to transfer substantial assets out of your estate without triggering gift tax consequences.

Minor’s Trust

A minor’s trust is another option to help pay for a grandchild’s education. A pros and cons comparison of a 529 plan and a minor’s trust is provided in the chart below. With these trusts, grandparents can make yearly gifts of $19,000 (or $38,000 for a married couple).

One major benefit of a minor’s trust is that the assets can be used for many purposes. This can include education, buying a home, or starting a business. Because of the trust structure, use of a minor’s trust will involve some administration, including filing tax returns.

529 Plans

529 plans are specialized investment accounts intended to help families save for college by allowing for tax-free growth of funds within the account and tax-free withdrawals for qualified education expenses. With 529 accounts, grandparents can make annual exclusion gifts ($19,000 per person; $38,000 for a married couple). Distributions from 529 accounts for qualified education expenses are not subject to federal income tax (see the chart for examples of qualified expenses). However, distributions for nonqualified expenses are subject to a 10% penalty as well as federal and state income tax.

Grandparent-owned 529 plans are not included as a countable asset on a student’s Free Application for Federal Student Aid (FAFSA). However, 529 plans may still be considered countable assets under the CSS system used by many private colleges to determine financial aid.