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New Gift-giving Idea Aids College Students

The price tag on a college diploma continues to increase faster than the general rate of inflation. There's not much you can do about that. However, a new private letter ruling issued by the IRS may create a unique planning opportunity for certain families.

This new ruling allows generous donors to pay for multiple years of schooling, free of federal gift tax, in one shot.

Background: As a general rule, you don't have to pay any gift tax on transfers under the annual gift-tax exclusion. For 2006, a donor can give each recipient, or “donee,” up to $12,000 without paying any gift tax. The annual exclusion is doubled to $24,000 if your spouse joins in the gift. If you exceed this annual amount, the gift may be sheltered from tax by the lifetime $1 million gift-tax exemption, but this will reduce the amount covered by the federal estate-tax exemption.

However, be aware of a special tax break for certain gifts. If you pay a child's tuition directly to an eligible school, the transfer is exempt from gift tax above and beyond the amounts covered by the annual gift-tax exclusion. For example, a grandparent can pay a grandchild's college or private school tuition for the entire year—in addition to any other gifts to the same donees sheltered by the annual gift-tax exclusion—with no federal gift-tax consequences.

The new private ruling extends this tax benefit for transfers to educational institutions.

Facts of the ruling: A taxpayer paid the tuition bills for each of his six grandchildren, ranging from kindergarten through the twelfth grade, in a single payment. Since the taxpayer wasn't entitled to any discounts and fully relinquished all rights to the funds, even if the children did not attend the school in the future, the IRS said that the entire transfer was exempt from gift tax.

Based on this new private ruling, a donor can make tuition payments for multiple years completely free of gift tax. This technique can be particularly beneficial to affluent taxpayers who want to reduce their taxable estate at the same time they help out other family members.

Of course, there are potential drawbacks to these arrangements. For example, the donor risks the loss of funds if the child doesn't attend the school or decides to transfer to another school. Alternatively, if the donor makes the payment with conditions attached (e.g., the school agrees to refund the money if the child doesn't enroll there), the IRS could rule that the payment constitutes a taxable gift. Additional guidance from the IRS is expected in the near future.

Lesson to be learned: In any event, you may decide to implement a lifetime gift-giving strategy to reduce the size of your taxable estate. For example, if you and your spouse jointly give five grandchildren $24,000 each for a period of five years in a row, you will reduce your estate by $600,000. If it's applicable, we can help you coordinate this strategy with other aspects of your estate plan.

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	[ return to list ] New Gift-giving Idea Aids College Students The price tag on a college diploma continues to increase faster than the general rate of inflation. There's not much you can do about that. However, a new private letter ruling issued by the IRS may create a unique planning opportunity for certain families. This new ruling allows generous donors to pay for multiple years of schooling, free of federal gift tax, in one shot. Background: As a general rule, you don't have to pay any gift tax on transfers under the annual gift-tax exclusion. For 2006, a donor can give each recipient, or “donee,” up to $12,000 without paying any gift tax. The annual exclusion is doubled to $24,000 if your spouse joins in the gift. If you exceed this annual amount, the gift may be sheltered from tax by the lifetime $1 million gift-tax exemption, but this will reduce the amount covered by the federal estate-tax exemption. However, be aware of a special tax break for certain gifts. If you pay a child's tuition directly to an eligible school, the transfer is exempt from gift tax above and beyond the amounts covered by the annual gift-tax exclusion. For example, a grandparent can pay a grandchild's college or private school tuition for the entire year—in addition to any other gifts to the same donees sheltered by the annual gift-tax exclusion—with no federal gift-tax consequences. The new private ruling extends this tax benefit for transfers to educational institutions. Facts of the ruling: A taxpayer paid the tuition bills for each of his six grandchildren, ranging from kindergarten through the twelfth grade, in a single payment. Since the taxpayer wasn't entitled to any discounts and fully relinquished all rights to the funds, even if the children did not attend the school in the future, the IRS said that the entire transfer was exempt from gift tax. Based on this new private ruling, a donor can make tuition payments for multiple years completely free of gift tax. This technique can be particularly beneficial to affluent taxpayers who want to reduce their taxable estate at the same time they help out other family members. Of course, there are potential drawbacks to these arrangements. For example, the donor risks the loss of funds if the child doesn't attend the school or decides to transfer to another school. Alternatively, if the donor makes the payment with conditions attached (e.g., the school agrees to refund the money if the child doesn't enroll there), the IRS could rule that the payment constitutes a taxable gift. Additional guidance from the IRS is expected in the near future. Lesson to be learned: In any event, you may decide to implement a lifetime gift-giving strategy to reduce the size of your taxable estate. For example, if you and your spouse jointly give five grandchildren $24,000 each for a period of five years in a row, you will reduce your estate by $600,000. If it's applicable, we can help you coordinate this strategy with other aspects of your estate plan. [ return to list ]
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