Gifting, Part 2: Tuition and Medical Expenses

Another easy way to make gifts is to pay an individual's tuition or medical expenses.  If you do this directly (i.e. pay the educational or medical entity, not the person you are trying to help), and follow certain other rules, the payments are exempt from gift tax under Internal Revenue Code section 2503(e).  Two big plusses:

1. There is no dollar limitation on gifts for tuition and medical expenses (you could give $100 or $100,000); and

2. Gifts for tuition and medical expenses can be in addition to gifts made using the annual gift tax exclusion amount (currently $11,000).  So, for instance, if you were married and had a grandchild attending Northwestern University in 2004-2005 (tuition numbers here), you might make the following gifts to the grandchild during the 2004-2005 school year:

2004: $22,000 (using annual gift tax exclusion amount for you and your spouse)

Tuition gift, paid directly to Northwestern University: $29,940 (tuition of $9,980 per quarter for three quarters)

2005: $22,000 (again, using annual gift tax exclusion amount for you and your spouse)

For information about the rules that apply to section 2503(e), you may want to download this pdf document, written by Detroit-area estate planning and probate attorney Patricia Gormely Prince.