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A Gifting "Gotcha" - Gifting and Qualified Tuition Plans
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A Gifting
"Gotcha" —
Gifting and Qualified Tuition Plans
By: Patricia T. Henssler, C.P.A.
The Henssler Financial Group Position Paper | |
 Tuition
payments to a qualified educational institution are exempt from the gift
tax rules (as are medical payments made to the medical provider). This means that
you, a grandparent, or anyone, can gift a child $12,000 (2008 amount, indexed)
and pay their college tuition to Harvard (you are required to make the check out
to the institution).
We
are now getting a lot of good questions regarding gifts in conjunction with 529
Plans and the Education Savings Account. Unfortunately, this is in black and white
in the IRS Code. The IRS Code specifically states that contributions to a qualified
tuition program or Education Savings Account are gifts. "After
August 5, 1997, any contribution to a qualified tuition program, whether sponsored
by a state or a private education institution, on behalf of a designated beneficiary
is a completed gift of a present interest eligible for the annual exclusion at
the time the contribution is made.1
Similar treatment is accorded to any contribution to a Education Savings Account
(formerly known as an education IRA) after 1997.2
Neither gift is treated as a qualified transfer eligible for the educational gift
tax exclusion.3
If a donor's contribution, made after August 5, 1997, exceeds the annual gift-tax
exclusion amount, ($12,000 in 2008), the donor may elect to take the excess into
account ratably over five years.4
Thus, an individual may contribute up to $60,000 per child in one year tax free
of gift tax due to the allowance of the five-year spread of the annual gift tax
exclusion."
This may take careful planning, or careful "remembering"
in the future regarding gifts to your children, grandchildren, etc. Example
1
Contribute $60,000 this year to a qualified tuition program for your
child. Choice
1 - Claim $12,000 as part of the annual gift exclusion and pay gift tax or
use part of your lifetime exemption for the $48,000 balance.
Choice
2 - Elect to treat the $60,000 over a five year period. You would use $12,000
per year for five years. The
Code does allow you to make additional gifts in future years, exempt from gift
tax, if the annual allowance increases. Therefore, if it were to increase to $13,000
next year, you could gift your child $1,000 next year and be exempt from gift
tax. Example
2
Contribute $15,000 this year to a qualified tuition program for your
child. Choice
1 - Claim $12,000 as part of the annual gift exclusion and pay gift tax or
use part of your lifetime exemption for the $3,000 balance.
Choice
2 - Elect to treat the $15,000 over a five year period. You would use $3,000
per year for five years. You would then be able to make additional cash gifts
to your children, up to the annual exclusion, each year for the five years.
Planning
Opportunity According
to IRS Technical Advice Memorandum 199941013, July 9, 1999, prepaid tuition qualifies
for the gift tax exclusion. A
grandmother's payments to a school for her two grandchildren's tuition qualified
for the unlimited gift tax exclusion for qualifying tuition payments. The grandmother
paid tuition for the current year and nine subsequent years to the school her
grandchildren were currently attending. The payments, which were specifically
designated as for her grandchildren's benefit, were not refundable if the children
ceased attending the school. Any shortfall due to increases in tuition in future
years would be covered by payments from the children's father.
Since
the payments qualified as gifts (although not part of the annual exclusion), they
were not includable in the grandmother's taxable estate. A grandparent wishing
to maximize annual excludable gifts in order to minimize the size of the grandparents'
taxable estate can use prepaid tuition plans as an estate planning tool. These
payments must be made directly to the school in order to qualify for the exclusion. If you would like further information regarding this topic or any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
1 Code Sec. 529 (c)(2)
2 Code
Sec. 530(d)(3)
3 Code Sec. 529(c)(2)(A)(ii), 530(d)(3), 2503(e)
4 Code
Sec. 529(c)(2)(B) | |
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