By Mary M. Paul
Many grandparents and other concerned family members are aware of the ever-increasing costs of education, and are looking for ways to help defray tuition and other expenses. The following is a summary of the way annual gifts may be used to pay tuition expenses.
As of January 1, 2007, each taxpayer may give up to $12,000 to an unlimited number of individuals free of gift taxes. For married persons, this $12,000 per person annual exclusion doubles to $24,000 if both spouses consent to the gift or if community property is given. The property may be given outright to the donee, or given to a trust that meets specified conditions.
Smart Gifting
If a student is approaching college age, the grandparent might want to write a check for tuition payments directly to the school. If such payments are made directly to a qualified educational organization, no gift or generation-skipping taxes should be incurred. Amounts paid for books and room and board are not eligible for this gift tax exclusion.
Smarter Gifting
Certain taxpayers may contribute to an education savings account (Coverdell). In 2007, up to $2,000 per beneficiary may be contributed to an account, which will grow income tax free. Distributions will be tax-free provided they are used for qualified educational expenses. Certain income limitations apply, but contributions are not limited to parents - grandparents, aunts, uncles and cousins may also contribute to an account on behalf of a beneficiary - as long as there is no more than $2,000 contributed in any year. In addition, these contributions may now be made up through April 15th of the following taxable year.
Smartest Gifting
Parents, grandparents and others may now create a qualified tuition program account (QTP) or “Section 529 Plan.” Income earned in the account is tax deferred - like an IRA. No part of a distribution from a state sponsored program to, or for the benefit of, a designated beneficiary is taxable if an eligible recipient uses the distribution for qualified higher education expenses. There will be no taxable gift (as long as the gift is within the annual exclusion) on the contribution of the funds. Furthermore, taxpayers are allowed to gift up to five times the annual gift tax exclusion amount in one year to a 529 college savings plan account on behalf of a designated beneficiary without incurring gift taxes ($60,000 in 2007). Married couples who gift-split may gift up to $120,000 in a single year (2007). These five-year accelerated gifts may also be a great way to reduce the size of your taxable estate. There is no taxable gift on the distribution of the funds. Additionally, the plan allows for a change in beneficiaries, including a reversion back to the donor. Drawbacks of this plan include the possibility that the plan may disqualify a student for financial aid, gift discounting is not available because only cash gifts are allowable, and the tuition could have been paid directly in addition to making an annual gift.
Brilliant Gifting
Under a QTP, if the donor dies within five years of any contributions to the plan, the "unexpired amounts" are included in the estate, i.e. amounts in excess of the annual exclusion amount that would have been applicable in the preceding years by a donor utilizing the election to accelerate annual exclusions for gift to a 529 plan. If instead the donor made direct nonrefundable prepayments of tuition to the educational institution, no amounts are included in the estate of the donor regardless of how close in time before death the transfers were made.
Estate and gift planning, along with college tuition planning, are complex, and it’s always best to consult with a financial advisor before taking any major steps.
Mary M. Paul is a small business specialist with Mengel, Metzger, Barr & Co. LLP. She may be reached at MPaul@mmb-co.com.
Reprinted with permission of The Daily Record 2007
