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What is a Qualified Transfer?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 15 September 2016
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A qualified transfer is a transfer of funds which are not considered a gift for the purposes of determining taxes. This is designed to avoid situations in which someone makes over funds for the benefit of someone else in certain circumstances, and the beneficiary of the funds is forced to pay taxes on them. To prevent situations in which people try to bypass gift taxes, the rules on what constitutes a qualified transfer are very strict.

One form of qualified transfer is money which is paid directly to an educational institution to fund someone's education or training. The money cannot be given to the student to pay the school, but must be sent directly to the institution with receipts to document the payment. The institution must also be accredited or otherwise qualified in the eyes of the government. Thus, a grandparent who pays a child's university tuition is making a qualified transfer, but if the child is attending an unaccredited school, the money may be subject to gift tax.

The other type of qualified transfer is a payment for medical care. Again, the payment must be made directly to the provider of the service and cannot go through the patient, and documentation is required to demonstrate this. People who need assistance with their medical costs at some point during their lives can find such qualified transfers beneficial because they receive help without having to pay tax on the money.

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For gift tax purposes, people are typically allowed a set value of transfer of property before gift tax kicks in. People who receive less than this amount do not need to be concerned about tax liability. Transfers of property in excess of this amount in a given year are, however, taxable. By exempting qualified transfers, the government allows people to receive assistance with key life expenses without being concerned about the need to pay tax on the gift of assistance.

Someone can make a qualified transfer on behalf of someone else and also offer a gift. For example, a grandparent paying tuition may also offer the grandchild a stipend to assist with living expenses and other costs associated with college. As long as this amount falls below the gift tax threshold, no taxes will need to be paid on it. The gift tax also applies to transfers other than cash, such as gifts of equity in a home.

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