Probate & Trust Law Section Conference Manual ... - Minnesota CLE

A. Qualified Transfers. Certain “qualified transfers” are not treated as gifts and
therefore do not count against the gift tax annual exclusion. “Qualified transfer”
means
any amount paid on behalf of an individual —
(A) as tuition to an educational organization described in section
170(b)(1)(A)(ii) for the education or training of such individual, or
(B) to any person who provides medical care (as defined in section
213(d)) with respect to such individual as payment for such medical care.
Code § 2503(e).
Section 2503(e) permits an individual to make unlimited payments for tuition as
long as those payments are made directly to an educational organization described
in section 170(b)(1)(A)(ii).
1. Tuition. The exclusion applies only to tuition (full or part time) and does
not apply to payments for books, room and board, or supplies.
2. Educational Institution. The educational institution must be described in
section 170(b)(1)(A)(ii), which requires that the organization (1) have the
primary function of the presentation of formal instruction, (2) normally
maintain a regular faculty and curriculum, and (3) have a regularly
enrolled body of pupils or students in attendance at the place where its
educational activities are regularly carried on. The school may be at any
level, from nursery school to graduate level. Tuition at foreign schools
also qualifies. Treas. Reg. § 25.2503-6(c), Example 1.
3. GST Exclusion. The GST tax also does not apply to a transfer that
qualifies for the section 2503(e) exclusion (direct payment of tuition or
medical expenses). A gift at death or a distribution from a trust is not a
generation-skipping transfer if the transfer, “if made inter vivos by an
individual, would not be treated as a taxable gift by reason of section
2503(e).” Code § 2611(b)(1); see also Priv. Ltr. Rul. 9823006 (June 5,
1998).
4. Gift to Trust Does Not Qualify. A gift to a trust that provides that the
funds are to be used for tuition expenses incurred by the beneficiaries does
not qualify because the transfer to the “trust is a completed gift for federal
gift tax purposes and is not a direct transfer to an educational
organization.” Treas. Reg. § 25.2503-6(c), Example 2; see also Priv. Ltr.
Rul. 9823006 (June 5, 1998).
B. Prepayment of Tuition. Prepayment of tuition may qualify for section 2503(e)
treatment in certain circumstances.
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