Legal Blog

The Weekly Scenario: Pre-Paying Four Years of College Tuition

Question: I heard that pre-paying four years of college tuition might be a possibility for my grandchildren. What happens if my grandchild decides not to finish school or drops out altogether? Answer: More wealthy individuals are prepaying the tuition expenses (excluding room and board) on an annual basis or more multiple years for younger family members directly to qualified educational organizations. Doing so can be a way to reduce a wealthy individual’s estate as well as avoiding the gift tax. Many schools even allow an individual to prepay the primary and secondary school tuition expenses at a private school. The payment is however typically nonrefundable. The school then applies the prepaid funds for the payment of the student’s tuition and often there is an agreement in place to memorialize the arrangement. So what happens if the student drops out prematurely or transfers to another school? The arrangement should be discussed with the school ahead of time and the approach might be that in such event the funds could be automatically transferred to another school at the behest of the grandparent. Comment: To my knowledge, the IRS has not specifically addressed this issue so clearly there is inherent risk to the transaction.


Steve Shane Head Shot for webSteve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates. You can also connect with Offit Kurman via Facebook, Twitter, Google+, YouTube, and LinkedIn.