There are two ways to approach financing education in estate planning. One involves the way a family pays for a child’ s education directly. The second approach involves the way a student pays using his or her own income.
Paying Directly
The single most powerful tool here is also the simplest. Under Internal Revenue Code Section 2503( e), tuition paid directly to an educational institution is entirely exempt from gift taxes. There is no dollar limit, and also no need for the family to use up their annual give exclusion or draw on their lifetime exemption. A grandparent can pay for their grandchild’ s $ 90,000 professional-school tuition bill in full every year, and for transfer-tax purposes it is as if the transfer never happened.
The catch is that the payment must go directly to the school, and only tuition qualifies. It can’ t go for room, board, books, or fees. However, used deliberately, this one provision can absorb most of the money gaps created by the new borrowing caps.
Where a direct payment can’ t reach, a 529 plan often can, and the One Big Beautiful Bill expanded the program.
Beginning in 2026, families can withdraw up to $ 20,000 a year for K-12 expenses, double the previous limit. Families can also use 529 funds for a broader set of costs, including books, tutoring, and testing fees, and they can apply up to $ 10,000 toward their child’ s student loans, plus another $ 10,000 for each sibling.
In addition, a 529 plan can be“ superfunded.” A donor may front-load five years of annual-exclusion gifts, filling the account with up to $ 95,000 per beneficiary or $ 190,000 for a married couple splitting the gift. These tools allow donors to move a substantial sum out of the estate immediately while it grows tax-free for education.
For families who want more control than a 529 allows, there are older trust vehicles that remain useful, including a Section 2503( c) trust( designed for minors) or a Crummey trust( an irrevocable trust for older beneficiaries that allows them rights to withdraw gifted funds). These
Private loans generally require a creditworthy co-signer, most often a parent or grandparent. Advisors warn that a grandparent co-signing in their 70s takes on a 10- to 15-year obligation that can outlast their working income.
vehicles can hold education funds inside a governance structure the family designs, qualify transfers for the annual exclusion, and dictate how and when money is released. Another tool is the Coverdell education savings account, which can pay for qualified education expenses. A family can also make intrafamily loans( following interest rules under Section 7872 of the Internal Revenue Code). Another code section allows a student’ s employer to offer tuition assistance( up to $ 5,250 a year, tax-free to the employee).
The Student’ s Income
After we’ ve looked at the ways the family pays directly, it’ s time to look at how students can pay for school with their own income, hopefully from within a lower tax bracket. This approach is subtler and, for business-owning families, often more elegant.
The simplest method is to put the child to work in the family business— offering them wages paid for real work at a reasonable rate that are deductible to the business and taxable to the child. These taxes are usually paid in a lower bracket and often sheltered entirely by the child’ s standard deduction.
If a parent is the sole proprietor or in a spousal partnership, a child under 18 who works for them is exempt from FICA taxes. Those same wages can fund a Roth IRA in the child’ s name, launching taxfree retirement savings decades early. And because this is earned income, it escapes the kiddie tax that would otherwise apply.
Avoiding the kiddie tax is key, since it’ s a trap in some parents’ more traditional approach, which is to simply gift incomeproducing assets to a minor. A child’ s unearned income above a modest annual threshold is taxed at the parents’ marginal rate, which erases much of the intended benefit while the child is young. Often, donors try to work around that problem in a few ways: Sometimes they hold the assets in a vehicle that controls timing. Other times they gift interests in a family limited partnership or LLC so distributions are governed rather than automatic. Or they otherwise wait until the child is old enough that the kiddie tax no longer bites. Each of these is an estate planning decision, not a checkbox— and each should be modeled against the family’ s broader gifting and succession strategy.
The Governance Point
The new student loan caps did more than change a financing formula. They pushed a cost that used to sit on the federal balance sheet back onto the families. Families that absorb it thoughtlessly— say, through a grandparent’ s co-signature on a private loan— risk trading a manageable planning problem for an unmanageable personal one.
Whether the subject is a trust, a family business, or a tuition check, the recurring question is the same: Who pays, through what structure, and with what accountability?
The families who will navigate this well are the ones who treat education funding as what it now plainly is: a component of the estate plan. That means clients must coordinate their attorneys, tax advisors, and wealth managers before the tuition bill arrives— deciding which dollars are gifted outright; which flow through a 529 or a trust; which are earned by the student; and which, if any, are borrowed.
Done in isolation, each choice is a transaction. Done together, they are a plan.
MATTHEW ERSKINE is managing partner of fourth-generation Worcester, Mass.-based Erskine & Erskine. He’ s a frequent public speaker and a fellow at the Family Firm Institute.
SEPTEMBER / OCTOBER 2026 | FINANCIAL ADVISOR MAGAZINE | 55