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Anthony L. Engel:

College is expensive. The same is true for private primary and secondary school education. Even if you can afford it, it's still a big expense. If you're looking to save for a child's education, it can make a big difference to consider strategies that maximize tax advantages.

We'll take a look at four approaches that could make sense for you. The most straightforward option is to put the money aside and pay the tuition outright when the bill arrives. And if you make the payments directly to the school, they won't be subject to gift taxes or even use any of your annual gift tax exclusion or lifetime gift tax exemption. Each year, the IRS allows you to give away a certain amount to as many people as you want without incurring gift tax.

That's the annual gift tax exclusion, and the amount is adjusted periodically. As of this recording, it's $19,000 per recipient. And the lifetime exemption, the IRS also allows you to give away a certain amount during your lifetime without any gift tax implications. This is completely separate from the annual exclusion.

So basically, if you give away more than the exclusion amount in a single year, you would use your lifetime exemption for that excess amount as long as you haven't used all of your exemption already. The exclusion and exemption are relevant to other education savings approaches, but they don't apply to tuition payments made to a school directly. It's also worth mentioning that grandparents can avoid another tax that's often an issue with large gifts to grandchildren, the generation-skipping transfer tax. The risk, especially for older grandparents, is that they might not be alive to make these payments for all of their grandchildren.

Another option that gets around this issue is to fund a custodial account, sometimes known as a UTMA account. It was named for the legislation that established it, the Uniform Transfers to Minors Act. UTMA funding can be done with annual exclusion gifts over a period of years, so there's no gift tax when the money goes in. But here's the thing.

You can be the custodian and control investments and distributions but only until the child becomes a legal adult, age 18 or 21 in most states. At that point, the child would have sole control of the assets. For some parents, that could be an issue, but there are other options. For a bit more control, consider a 529 savings plan.

Funds contributed to these popular plans grow free from federal and sometimes state income tax. Withdrawals are also free from taxes if they are used for qualified college expenses. These plans come with restrictions, so make sure they align with your goals. For more on this, please watch "What Are 529 Plans?" video.

If you're looking for more flexibility, education trusts can offer tax advantages and greater control, but they are more complex and costly to establish than the other approaches. A Section 2503(c) minor's trust can receive annual exclusion gifts and can then be used to support a child's education and other expenses until they turn 21 while still allowing the trustee to manage assets. At age 21, the beneficiary will either receive the assets outright or be given the option to withdraw them.

A Crummey trust, named after the court case that allowed them, is another popular option. It can receive annual exclusion gifts as long as formal notice is provided to the beneficiary each year. The trust can then be used for education and other early adult expenses, such as buying a car or making a down payment on a home. These trusts also allow for more control over when and under what circumstances distributions are made compared to UTMA accounts, as there is no age 18 or 21 termination required.

Finally, there's the Health and Education Exclusion Trust, or HEET trust. This allows grandparents to pay tuition and medical costs for their descendants essentially for generations while sidestepping some generation-skipping transfer tax limits. A charitable organization must be named a co-beneficiary along with these descendants and receive distributions over time, so this could be an option to consider if you're also charitably inclined. OK, let's recap.

We've outlined four tax-efficient ways to save for education. One, direct payment, the simplest approach. You can make unlimited cash payments for tuition only, and they're free from gift and generation-skipping transfer taxes. Two, custodial or UTMA accounts.

You or your designated custodian controls investment decisions and distributions but only until the child becomes a legal adult. Three, 529 savings plans. They're easy to establish. Growth and withdrawals incur no taxes if funds are used to pay for qualified educational expenses.

And fourth and last, education trusts. They can be complex but offer the most flexibility and control. Choosing the right strategy depends on your particular needs and goals. Sometimes a combination of methods works best.

It can make sense to consult with your Bessemer advisor if you're a client or your tax or estate planning professionals who can help you design a plan that's both generous and tax efficient.

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