Maximize Gifting As A Planning Strategy
Effective use of gifting can have a substantial impact on reducing an otherwise taxable estate. In this context, we are referring to the use of annual exclusion gifts and payment of tuition and medical expense gifting. There are other forms of gifting to take account of valuation discounts, but that is left for another Blog.
For 2009, each individual is entitled to make an annual tax-free gift of $13,000 to as many individuals as he/she wants. A named couple may thus give away $26,000 to as many individuals they want. The numbers are obvious. A well orchestrated annual gifting strategy can help reduce a taxable estate.
Importantly, a gifting strategy often overlooked by individuals, is the fact that under the Internal Revenue Code, one can make payment of tuition and/or medical expenses for another and not have these payments count against the annual exclusion amount. Yes, this means that you and your wife can pay grandson's tuition and give him $26,000 in the same year thereby reducing your estate and not incurring any gift tax. The payment must be made directly to the school and/or medical provider and tuition means tuition -- not room/board and incidentals.
The tuition expense exclusion can be used to prepay multiple years of tuition payments. Tuition is prepaid to the school and must not be refundable. This strategy is best suited for people concerned that they might not live long enough to pay each year's tuition. Who can afford to make the payments now and not be concerned that the school will get to keep the money regardless of the student's status at the school. (What happens if grandson gets expelled or voluntarily leaves?) Not a problem. To address this concern, we drafted for clients a Health Education Exclusion Trust ("HEET") . Properly done, you can place significant sums into the Trust earmarked for tuition expenses and not be concerned with having prepaid tuition to a school that grandson leaves. Moreover, this type of Trust can benefit multiple generations free of future gift, estate and generation skipping taxes.
To all, we strongly suggest implementation of well-crafted gifting strategies.
