According to IRS Publication 501, Exemptions, Standard Deductions and Filing Information. a dependent qualifying relative can be any person who lives with you all year, is not a qualifying child of another taxpayer, and someone for whom you provided over half of his or her support whose gross income for the year is less than the exemption amount ($3,700 for 2011). In calculating income you disregard tax-exempt income such as nontaxable scholarships and the nontaxable portion of social security payments.
Here’s the scenario I encountered, it may be similar to yours. An unmarried couple lived together along with a minor child of whom partner 1 was the father. Partner 1 died naming partner 2 as the child’s guardian as the child’s birth mother was also dead. The child’s only income in 2011 was non taxable social security payments of $6,000. The birth father put $3,000 of those payments into a college fund for the child and used the rest for the child’s support before his death. Partner 2, the guardian, calculated the fair rental value of the child’s lodging, food, clothing, transportation, education, recreation and medical expenses for a total of $9,000 and wanted to know if the child could be claimed as an exemption not knowing about the definition of a qualifying relative. The answer is yes he can. The important point is that money put into savings on behalf of the child is not considered support. Support is money actually spent on behalf of the dependent.