William F. Davis, CFP® | Vericrest Private Wealth
Every fall, some version of the same conversation happens at our office. A client wants to help pay for a grandchild’s college, or set money aside for a child who’s still in diapers, and the question is always framed the same way: should I open a 529?
It’s a fine question. It’s just not the only question, and for some of you, it isn’t even the most important one.
The Simple Path: A 529, and a Detail Most People Get Wrong
A 529 plan is the default answer for good reason. Contributions grow tax-deferred, withdrawals for qualified education expenses come out tax-free, and the money still belongs to the account owner, not the child, which matters more than people expect once a teenager starts making decisions.
Here’s the detail almost every Pennsylvania client gets wrong: you don’t have to use PA’s own 529 plan to get the state tax deduction. Pennsylvania is what’s called a tax-parity state, meaning the deduction applies to contributions to any state’s 529 plan, not just its own. For 2026, that deduction runs up to $19,000 per beneficiary for a single filer, $38,000 if you’re married filing jointly, which isn’t a coincidence. It’s set to match the federal annual gift tax exclusion.
For most families, that’s the whole conversation, and it should be. A 529, funded up to the state deduction, is simple, effective, and does exactly what it’s supposed to do.
The Other Path: Skip the Exclusion Entirely
For families doing more deliberate estate planning, usually because there’s a meaningful amount of wealth that will eventually need to move to the next generation regardless of what happens with college, there’s a second tool that gets far less attention than it deserves.
Tuition paid directly to an educational institution, the check or wire goes straight to the school, not to the student or a 529 account, is excluded from gift tax entirely under federal law. Not partially excluded. Not counted against your annual exclusion. Fully outside the gift tax system, with no dollar limit, as long as it’s tuition specifically and not room, board, or books. The same treatment applies to medical expenses paid directly to a provider.
That’s the piece people miss. If you pay a grandchild’s tuition bill directly to the university, you haven’t touched your annual gift tax exclusion at all. It’s still sitting there, fully available, to use somewhere else.
Why You’d Want Both at the Same Time
This is where it gets interesting for anyone actively working to move assets out of a taxable estate. Pay tuition directly to the school, which costs you nothing in exclusion. Then use your full annual exclusion, $19,000 per person, per beneficiary in 2026, to fund an irrevocable trust for that same child or grandchild, or for anyone else you’d like to benefit.
Run that every year for a handful of grandchildren and you’re moving real money out of your estate on two separate tracks at once: an unlimited, gift-tax-free track for education, and a fully preserved annual exclusion funding a trust that isn’t limited to tuition at all. The trust can hold money for a first home, a wedding, a business, or simply grow for a few decades, none of which a 529 was ever built to do.
Which One Is Actually Right for You
Depends entirely on what you’re solving for, not on which one sounds more sophisticated.
If college funding is the goal and estate size isn’t a pressing concern, a 529 is the right, simple answer. Take the PA deduction, let it grow, done.
If you’re already thinking about how to move wealth out of your estate over time, whether because of where your net worth sits today or where it’s headed, pairing direct tuition payments with trust funding accomplishes more with the same dollars, because you’re no longer choosing between paying for school and making progress on the estate plan. You’re doing both, without either one limiting the other.
What Actually Helps
If you’re in Pennsylvania, confirm you’re actually taking the state deduction, and remember it applies to any state’s 529 plan, not only PA’s, so the “best” 529 for investment options doesn’t cost you the tax benefit.
If tuition bills are already being paid for a grandchild, ask whether they’re being paid directly to the school. If they’re being reimbursed to a parent instead, that payment doesn’t qualify for the unlimited exclusion, and it’s an easy fix once you know the rule.
If an irrevocable trust for the next generation is already part of the conversation, look at whether direct tuition payments could free up exclusion you’re currently spending through a 529 instead.
Don’t assume these are mutually exclusive. Plenty of families use a 529 for the bulk of college savings and layer in direct tuition payments or trust funding for a specific year or a specific grandchild.
Why Now
Both halves of this only work within the calendar year. The annual gift exclusion resets January 1 and doesn’t carry forward, the PA state deduction is a 2026 tax return question, and spring semester tuition bills often land in December, which is exactly when a direct payment can do double duty: it pays the bill and it’s already this year’s move if you’re trying to use exclusion before it resets.
If paying for school has been the entire estate conversation in your family, that’s worth revisiting. And if there hasn’t been an estate conversation at all, well. That’s usually the more interesting one anyway. Let’s talk.
#CollegeSavings #EstatePlanning #529Plans #WealthManagement #FinancialPlanning #VericrestPrivateWealth
William F. Davis is a CERTIFIED FINANCIAL PLANNER™ and Managing Partner with Vericrest Private Wealth LLC, a financial advisory firm in Newtown, Pennsylvania.
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