Direct tuition payments for students get two breaks. They don’t count against the $14,000 gift tax exclusion and they reduce the size of your taxable estate. The same rule applies for direct payments of a donee’s medical expenses.
There is a special rule for payments to 529 plans to help your children or anyone else with college. You can put up to $70,000 free of gift tax this year…$140,000 is your spouse agrees. In most cases, the payins are out of your estate. Withdrawers are tax free if used for tuition, fees or books. But giving the maximum wipes out your 2013 and 2014 gift tax exclusion and most of it for 2015-2017, too. Larger gifts are tax-favored. You will not owe any gift tax on gifts over $14,000 as long as you don’t use up your $5.25 million estate tax exemption.
And any future rise in value of the assets you give away isn’t part of your estate. But the amount by which the gift exceeds $14,000 is added back to your taxable estate.