For grandparents

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My estate planner tells me I can reduce my estate by paying my grandchildren’s tuition and not even have to worry about the gift tax. So why should I use 529 plans?

Your planner is correct in saying that the payment of tuition by you directly to a school is not considered a gift. (The school can be any educational institution, not just college.) If you have ways to utilize your $14,000 annual gift exclusion other than through contributions to a 529 plan or Coverdell ESA, the direct payment of tuition can be an effective tool for further reducing your taxable estate.

If you are not currently utilizing your $14,000 annual exclusion, you should understand the advantages of funding a 529 plan now and not waiting until your grandchild has tuition bills to pay. For one thing, you remove any risk that you will die before the money can be removed from your estate through direct payments of tuition. For another, the gift tax exclusion for direct payments applies to tuition but not to other costs that can be covered by 529 plans such as room and board, books, supplies, and equipment. Finally, be aware that the school is likely to treat your direct payment of tuition as a “resource” that reduces financial aid awards on a dollar-for-dollar basis. With a 529 plan, you can request that the withdrawal be made payable to the student, not to the institution, and this may (depending on the policies of the institution) lead to a better financial aid result.