The ESA could be used for room and board while the money for living expenses is already being taxed. The full scholarship is a little unclear, if that includes room and board plus tuition. then your daughter would need to pay tax on the room and board portion to make your ESA tax free. One of you has to pay tax and I imagine her tax rate is lower than yours.
Double check your income and expenses with the IRS pub 970.
For information on contributions and how to determine the part of any distribution that is taxable earnings, refer to Chapter 7 of Publication 970, Tax Benefits for Education.
Page 52 states: Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses the beneficiary has in the same tax year. See page 5
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