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Tuition prepayment by donor not subject to gift or GST tax.

In Letter Ruling 200602002, the IRS ruled that a donor's prepayment of tuition for each of six grandchildren for multiple years through grade 12, made directly to a school, will be deemed qualified transfers excluded from the girl tax under Sec. 2503(e) and will not be deemed generation-skipping transfers (GSTs) under Sec. 2611(b)(1). Under the agreement with the school, the donor acknowledged that tuition may increase in subsequent years, and the balance due after the application of the prepayment for that year will be paid by the donor or the parents of the respective grandchild (who will sign a consent). The agreements provide that the tuition prepayments are nonrefundable, and once paid become the sole properly of the school.

As pointed oat in the letter ruling, this is in contrast to the situation presented in Regs. Sec. 25.2503-6(c), Example (2), in which funds were transferred to a trust that required the trustee to use the trust funds to pay tuition expenses for the transferors grandchildren. In Example (2), because the funds transferred to the trust were not made to an educational organization in payment of specific tuition costs for a designated individual, they did net qualify under this exception. It seems that as long us the prepayment is made directly to the school for tuition costs of specific individuals, it will not be treated us a completed girl for gift tax or GST tax purposes.

Eileen Sherr, CPA, MT, AICPA Technical Manager--Taxation, Washington, DC and Steven A. Thorne, Deloitte Tax LLP, Chicago, IL
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Title Annotation:generation-skipping transfers
Author:Thorne, Steven A.
Publication:The Tax Adviser
Date:Jun 1, 2006
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