If a grandparent's trust pays $50,000 directly to a grandchild's university for tuition, this payment is best categorized as which?

• A. Direct Skip
• B. Taxable Distribution
• C. Unlimited Exclusion Payment
• D. Taxable Termination

Answer: (C)

Direct tuition payments to an educational institution by a donor are treated as an unlimited exclusion from gift tax. The rule is that when a grandparent pays tuition directly to the college or university for someone else’s education, that amount isn’t considered a gift to the recipient for gift tax purposes, and it doesn’t count against the donor’s annual gift tax exclusion. This can be done for any amount and still be excluded, which is why it’s described as an unlimited exclusion payment. It’s different from ordinary gifts or trust distributions that are taxable or subject to other tax rules, because the payment is for qualified education expenses and goes straight to the school. So, the direct tuition payment fits the unlimited exclusion category.