How an Inheritance Can Enhance Your Loved One’s Education

A primary goal of estate planning is to provide for your loved ones financially. One way to ensure they are set up for lifelong success is with an inheritance that covers their education expenses.

Higher levels of education are positively correlated with better life outcomes, including improved health, longer lifespans, and higher incomes.^[1] However, education costs across all levels have risen significantly, making a good education unaffordable for many families and saddling students with debt that can take decades to repay.^[2]

From primary school to postgraduate studies, you can invest in a loved one’s education and maximize their potential through your estate plan. Options include direct payments, 529 plans, and money from a will or trust, often with associated tax breaks.

While educational gift options abound, their legal mechanics, tax implications, and benefits differ depending on when and how they are given, and restrictions may apply.

Higher education = Greater Well-Being—but at What Cost?

The economic and non-economic benefits associated with a college degree are well established.

Compared with people who completed only a high school diploma, those with undergraduate degrees not only earn significantly more on average over their lifetimes and are less likely to be unemployed but also tend to enjoy better health and a higher quality of life, including higher job satisfaction, improved self-esteem, improved access to healthcare, and increased civic engagement.^[3]

According to the United States Bureau of Labor Statistics, people with a bachelor’s degree earn two-thirds more than high school graduates.^[4] Over their working years, college graduates typically earn around $1 million more than their peers without a degree.^[5]

Although the economic advantages of a college degree vary based on the degree earned^[6]—and despite the rising costs of postsecondary education—most Americans recognize the value of college and view a degree as a “golden ticket” to prosperity.^[7]

However, earning a college degree has never been more expensive, and these costs are forcing some Americans to rethink whether it is worth the investment.

Tuition and fees have tripled since the 1960s, jumping by 60 percent between 2000 and 2022, from around $9,000 to nearly $15,000 per year.^[8] From 2010 to 2022, the average annual tuition and fees increased from $12,979 to $14,688—a 13 percent rise.^[9]

These rising costs, which include room and board, books, and other supplies in addition to tuition, are discouraging many students from attending college and contributing to enrollment declines.^[10]

The average federal student loan debt balance in 2024 was nearly $40,000, while the total average balance, including private loan debt, is even larger.^[11] Today, the typical public university student borrows almost $32,000 to earn a bachelor’s degree.^[12] Far from being the “golden ticket” of a degree, student loan debt can limit wealth building and upward mobility rather than opening doors.

Costs are also rising at K–12 private schools, which are generally considered a gateway to higher education. Research indicates that private schools outperform public schools in preparing students for college, primarily due to their higher standardized test scores and more rigorous graduation requirements.^[13] However, the average annual private school tuition ranges from $12,000 to $13,000, including approximately $9,000 for private elementary school and roughly $16,000 for private high school.^[14]

Today, a student who attends private schools from kindergarten through four years of postsecondary study can expect to pay more than $300,000.^[15]

As college enrollment declines, trade programs are filling the gap. Trade and vocational schools are often a more affordable option than a traditional four-year college. Programs typically cost between $5,000 and $20,000 and are often completed within two years.^[16] Enrollment in these programs, which many young people see as a quicker and more affordable path to a good job, has seen strong growth, including double-digit increases in some fields.^[17]

Additionally, students who take advantage of internships and externships during their college years have improved employment prospects.^[18] However, even a paid internship can impose costs on students, such as housing, transportation, and other living expenses.

Family Contributions Are Vital to Achieving Educational Goals

Families are a significant source of funding for education at all levels. For example, parents contributed an average of $13,000 per year toward undergraduate education costs.^[19] Family financial help can also play a significant role in covering the costs of trade school, private K–12 education, and internship-related expenses.

Every dollar a family invests in a loved one’s education alleviates their potential debt burden and fast-tracks their future success. To make your legacy a launchpad for their achievements, consider the following educational gifts and their potential tax benefits:

• Direct tuition payments. Tuition paid directly to an educational institution is not considered a taxable gift.^[20] This exemption applies to K–12 schools, colleges, and trade schools but covers only tuition—not room and board, books, or other expenses. It allows parents, grandparents, or other relatives to contribute without using their annual or lifetime gift tax exclusion.
• 529 plans. Contributions grow tax-free, and withdrawals for qualified educational expenses (such as tuition, fees, books, room and board, and computers) are also tax-free at the federal level. Since 2018, funds from 529 plans can be used for K–12 tuition, up to $10,000 per year. Some states offer tax deductions or credits for contributions, and starting in 2024, unused funds can be rolled into a Roth IRA for the beneficiary (subject to limits).
• Coverdell education savings accounts (ESAs). Contributions (subject to limitations and capped at $2,000 per year per beneficiary) are not tax-deductible; however, earnings grow tax-free if used for qualified educational expenses, ranging from kindergarten to higher education, including tuition, fees, books, supplies, tutoring, and specific technology needs. Additionally, they offer flexible investing options.
  
  

While tax benefits make it appealing to use those savings for a loved one’s education, not all education-related expenses fit the rules laid out above. Some expenses happen outside the classroom and may impose additional student costs that families can help cover. For example:

• Internships and externships. Even if the program pays the participant a small sum, the amount may not cover the expenses associated with participating in the program, such as rent (if the program is held in a different city or state), food, insurance, and other related costs.
• School field trips. Depending on the trip, the cost to participate can be expensive. Setting aside money for your loved one to participate in such activities can allow them to have additional life experiences that will shape them even after you have passed away.

You can support your loved one’s future by setting aside funds in a trust specifically for these types of expenses.

Gift Timing

Education funding can occur during your lifetime or after your death. Lifetime gifts use gift tax rules. Post-death gifts fall under estate tax rules that are applied at the time of death.

However, because the lifetime gift and estate tax are unified, using one affects the other, and lifetime and post-death estate planning strategies should not be viewed separately. You might, therefore, use a mix of lifetime and posthumous educational gift strategies. Consider these common scenarios:

During Life

• Direct tuition payments. You can pay tuition to an educational institution at any time while you are alive, and it is immediately exempt from gift tax.
• 529 plans. You can establish and fund a 529 plan while alive, taking advantage of tax-free growth over time and the ability to front-load five years’ worth of annual exclusions ($95,000 in 2025). You control the account and can adjust beneficiaries as needed.
• Payments to loved ones for a specific purpose. Currently, you can give $19,000 per year, per recipient, tax-free during your lifetime for any purpose, including non-tuition expenses such as internship costs or field trips, thereby reducing your taxable estate while you are alive.

After Death (via Will or Trust), Inheritance for education

• Direct tuition payments. You can set up a will or trust to allocate funds for tuition, directing your executor or trustee to pay educational institutions on behalf of a loved one.
• 529 plans. You cannot fund a 529 posthumously through a will because it is a lifetime savings vehicle tied to a living account owner. However, you can name a successor owner (e.g., a spouse or child) for an existing 529, or your estate can distribute funds to a beneficiary who then opens a 529. Although this option allows for the transfer of funds, it loses the pre-death tax-free growth benefit. After your death, the executor of your estate or the successor trustee of your trust can distribute the funds to an existing 529 plan, depending on what your will or trust instructs and what funds are available. Note that the contributions from a will or trust will not qualify for the gift tax exclusion and will still be part of the taxable estate. It is also important to name the account beneficiary and owner since the account owner will control how the funds are used.

You may also consider using a trust created through your will (testamentary trust) or funded during your lifetime (revocable living trust) that offers gifting flexibility. You can instruct the trustee to pay for tuition, tech, or living expenses, mimicking lifetime strategies. Trusts can also be tailored (e.g., “pay tuition directly to schools” or “distribute $10,000 yearly for education”).

Whether it incorporates a gifting-while-living strategy or a standard inheritance, your estate plan can unlock the power of education while taking advantage of tax breaks. Book a Discovery Call with us today to discuss specific strategies and which one is best for you and the student in your life.

^[1] Anna Zajacova & Elizabeth M. Lawrence, The relationship between education and health: reducing disparities through a contextual approach, Annual Rev. of Pub. Health vol. 39 (Jan. 12, 2018), https://pmc.ncbi.nlm.nih.gov/articles/PMC5880718.

^[2] Adam Looney, How Much Does College Cost, and How Does It Relate to Student Borrowing? Tuition Growth and Borrowing Over the Past 30 Years, Higher Educ. Today (Sept. 9, 2024), https://www.higheredtoday.org/2024/09/09/surprising-trends-in-college-costs-and-student-debt.

^[3] Shayna Joubert, 10 Benefits of Having a College Degree, Northeastern Univ. (Nov. 15, 2024), https://bachelors-completion.northeastern.edu/news/is-a-bachelors-degree-worth-it.

^[4] Employment Projections, U.S. Bureau of Labor Statistics (Aug. 29, 2024), https://www.bls.gov/emp/chart-unemployment-earnings-education.htm.

^[5] How does a college degree improve graduates’ employment and earnings potential?, Ass’n of Pub. and Land-Grant Univs., https://www.aplu.org/our-work/4-policy-and-advocacy/publicuvalues/employment-earnings (last visited Apr. 22, 2025).

^[6] Economic Benefits: How College Graduates Earn More Over a Lifetime, Baker Coll. (Nov. 27, 2024), https://www.baker.edu/about/get-to-know-us/blog/is-college-worth-it-benefits-of-going-to-college/#:~:text=For%20example%2C%20certain%20tech%2Doriented,not%20kept%20up%20with%20inflation.

^[7] Preston Cooper, Does College Pay Off? A Comprehensive Return on Investment Analysis, Freopp (May 8, 2024), https://freopp.org/whitepapers/does-college-pay-off-a-comprehensive-return-on-investment-analysis.

^[8] Jessica Bryant, Cost of College Over Time, Best Colls. (Feb. 25, 2025), https://www.bestcolleges.com/research/college-costs-over-time.

^[9] Id.

^[10] Id.

^[11] Melanie Hanson, Student Loan Debt Statistics, Educ. Data Initiative (Mar. 16, 2025), https://educationdata.org/student-loan-debt-statistics.

^[12] Id.

^[13] Marthy Naomi Alt & Katharin Peter, Private Schools: A Brief Portrait, p. 26, Nat’l Ctr. for Educ. Stat. (Aug. 2022), https://nces.ed.gov/pubs2002/2002013.pdf.

^[14] Melanie Hanson, Average Cost of Private School, Educ. Data Initiative (Aug. 29, 2024), https://educationdata.org/average-cost-of-private-school.

^[15] Id.

^[16] Lyss Welding, How Much Does Trade School Cost?, Best Colls., (May 23, 2024), https://www.bestcolleges.com/research/how-much-does-trade-school-cost.

^[17] Olivia Sanchez, Trade programs—unlike other areas of higher education—are in hot demand, The Hechinger Rep. (Apr. 17, 2023), https://hechingerreport.org/trade-programs-unlike-other-areas-of-higher-education-are-in-hot-demand.

^[18]  Diane Galbraith, Ph.D. & Sunita Mondal, Ph.D., The Potential Power of Internships and The Impact on Career Preparation, 38 Rsch. in Higher Educ. J. 3, https://files.eric.ed.gov/fulltext/EJ1263677.pdf (last visited Apr. 22, 2025).

^[19] What Percentage of Parents Pay for College?, Going Merry (May 30, 2024), https://goingmerry.com/blog/what-percentage-of-parents-pay-for-college.

^[20] I.R.C. § 2503(e), https://www.govinfo.gov/content/pkg/CFR-2010-title26-vol14/pdf/CFR-2010-title26-vol14-sec25-2503-6.pdf.