Private School Education As Tax Shelter

The New York Sun takes a closer look at the phenomenon of grandparents chipping in for exorbitant private school costs. But it’s not all bad news — grandchildren are actually a valuable tax shelter:

Pitching in with tuition is a choice, not a responsibility, Ann Lubin Buttenwieser, who has 13 grandchildren, said. Several of Mrs. Buttenwieser’s grandchildren are enrolled at schools such as St. Bernard’s, Spence, Dalton, and the 92nd Street Y, and she and her husband make annual gifts of varying sizes to the schools.

Mrs. Buttenwieser said many institutions host grandparents’ and special friends’ days, during which they are invited to take part in classroom lessons and activities; the schools collect the names and contact information of attendees. “Once they have names and addresses, I think development officers can figure out who they are, if they do some homework,” she said.

Other grandparents contacted by The New York Sun acknowledged helping out with tuition, but, seeking to protect their children’s privacy, declined to speak about it on the record.

. . .

Many grandparents helping out with tuition prefer to give the money directly to their children as a gift, rather than write the check to the school, the president of Educational Investments LLC, Harold Simansky, said. Based in Boston, the firm helps families plan for school expenses.

Mr. Simansky said that under federal law, gifts to an individual of more than $12,000 a year must be reported to the IRS. A gift tax of 46% goes into effect if a person gives away more than $2 million during his or her lifetime. Tuition paid directly to an educational institution is not considered a gift and is not taxed, according to a recent IRS ruling.

“Certainly, in the last five years or so, as we’ve seen tuition rise above the gift tax exclusion. Grandparents have come out of the closet because they cannot funnel it through their grandchildren’s parents,” Mr. Simansky said. Tuition payments are also a way for grandparents to reduce the value of their estate and avoid estate taxes, he said.