With education costs soaring to all time highs, making tuition payments for grandchildren and others can save lots of money in gift and estate taxes down the road - even if the donor is not alive when the tuition money is actually used.
By way of some background, the tax laws exempt tuition payments by grandparents or others from any gift taxes, provided certain requirements are met. First, the only educational costs that are gift-tax free are tuition costs. The cost of room and board, books, and other educational expenses are not exempt.
Second, the tuition costs must be paid directly to an educational organization that “normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” Notice that there is no requirement that the tuition costs be paid to a college or university. In fact, tuition payments for nursery school, private elementary school, and private high school may also qualify. It’s possible, too, that tuition payments for part-time courses, such as dance, theater, music, cullinary arts, and the like will also qualify for the gift tax exemption.
So, how is this such a good deal? In the first place, these tuition payments are not treated as taxable gifts, so you don’t have to worry about having them come under the annual gift tax exclusion. In fact, you can make tuition payments for your grandchildren or others and still give each of them the annual exclusion amount ($12,000 for 2006) as a birthday gift or whatever.
Second, if your estate is large enough to be concerned about federal estate taxes (currently in excess of $2 million, $4 million for a couple), then the amount of the tuition payments will be excluded from your estate upon your death. In other words, your tuition payments will not be subject to a gift tax when the payments are made, nor will they be subject to an estate tax upon your death. In addition, they will not be subject to any generation-skipping taxes (GST) upon your death
That’s pretty good deal by itself, but here’s an added bonus. On July 9, 1999, the Internal Revenue Service issued Technical Advice Memorandum 199941013 stating that prepayment of tuition costs was also exempt from gift taxes under IRC Section 2503(3)(2). In that particular case, a set of grandparents had made payments to a private school to cover tuitiion costs for their two grandchildren from pre-school through grade 12. There was an agreement between the school and the grandparents indicating that the tuition payments would not be refundable even if the grandchildren failed to attend the school each of those years. The total payments made by the grandparents amounted to over $181,000 over a two-year period.
Recently, the Internal Revenue Service issued a private letter ruling that supports the Technical Advice Memorandum cited above. In that case, the IRS told a taxpayer that prepayments of many years of tuition costs for his grandchildren would not be considered a gift.
While Technical Advice Memorandums and private letter rulings only apply to the taxpayer’s who request them, they are a good indication of the IRS’ position on specific tax matters. Here, it appears fairly clear that prepayment of multiple years of tuition costs will not be treated as a taxable gift by the IRS.
Now, let’s sort of put all this into perspective. In the TAM discussed above, the grandparents pre-paid roughly $181,000 of tuition costs over a two-year period. The payments were not treated as taxable gifts and, since the money was removed from their estate, it was not subject to estate taxes upon their death. If the grandparents kept the money until they died and then gave it to their grandchildren under their will, it would have gone through probate first, then would have been subject to a federal estate tax and then, possibly, a generation-skipping tax - all before it could be used by the grandchildren.
If the grandparents had a fairly large estate, say larger than $4 million, then the estate taxes paid on that $181,000 would be roughly $83,260 (based upon a marginal tax rate of 46%). In that case, prepaying the tuition costs resulted in an estate tax savings of roughly $83,260. Plus, the grandparents didn’t have to use up their annual gift-tax exclusion to get the estate tax savings.
Still, there are some drawbacks that you should be aware of. First, you have to have a large enough estate to be concerned about estate taxes. Second, you probably should be concerned about dying before your grandchildren complete their education. Otherwise, you could just pay the tuition costs as they become due.
Finally, when you prepay your grandchildren’s tuition costs, you won’t be able to get the money back if your grandchildren drop out of school or decide to attend a different school. Some schools may allow the money to transfer to another school, but that would have to be agreed upon beforehand. Even so, there is no guarantee the IRS will go along with those types of arrangements.
One final point, tuition payments excluded from gift taxes under IRC Section 2503(e)(2) are not the same as payments under a 529 plan. First, gifts to 529 plans come under the annual gift-tax exclusion. Prepaid tuition gifts are in addition to the annual exclusion gifts.
Second, gifts to a 529 plan are excluded from the donor’s estate only if the donor survives during each year for which the pre-payment was made. Prepaid tuition gifts are excluded from the donor’s estate as soon as the prepayment is made.
Third, 529 plans apply only to higher education (college and beyond) whereas prepaid tuition gifts apply to all levels of education, including nursery schools, elementary and high school.
Fourth, 529 plans apply to all education costs, including room and board, books and supplies, as well as tuition. Prepaid tuition gifts apply only to tuition costs.
That is not to say, however, that prepaid tuition gifts cannot be used in tandum with 529 plans.
For wealthy grandparents who are inclined to help with their grandchildren’s education costs, a prepaid tuition gift under IRC Section 2503(3)(2) certainly should be considered.
Copyright 2005. LivingTrustNetwork, LLC.
About the Author
Attorney Michael P. Pancheri is the founder and CEO of the Living Trust Network. You may contact him by email at info@livingtrustnetwork.com. You may also contact him at the Living Trust Network’s web site. Its URL is http://www.livingtrustnetwork.com.
You have permission to publish this article in your ezine or on your website, free of charge, as long as the resource box is included. Please send a courtesy copy of your publication to claudette@metavoice.org.
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Claudette Rowley
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Trust the Power of Your Intuition Claudette Rowley
Copyright 2004
Trust the Power of Your Intuition
“Every time you don’t follow your inner guidance, you feel a loss of energy, loss of power, a sense of spiritual deadness.” - Shakti Gawain
You have an important decision to make…your intuition is telling you one thing and your mind is advising another direction. You may have read about intuition or, heard people talk about the importance of following it, but still you hedge at taking the leap. What’s missing can be summed up in one word: TRUST.
What stops you from trusting your intuition?
- The Logical Mind - It’s not uncommon for logic to say “If it can’t be proven, seen, felt or heard, it’s hogwash. Give me facts, give me proof.”
- Social conditioning - Most of us aren’t raised in environments where our caretakers say, “Use that intuition! Really listen to it.”
- Doubt - Until we become attuned to the voice of our own intuition, we may harbor doubt. People often say to me, “I’m not sure if it’s my intuition or something else.”
- Inner critic/self-sabotage - Whenever you hear your inner wisdom, the inner critic is bound to pop up and offer its sabotaging opinion.
- You don’t like what your intuition tells you - Sometimes our intuition rings clear as a bell, and we don’t like what it says. For example: “You need to leave this job NOW.” Unless you have another job lined up or money in the bank, most of us would feel fear upon hearing that statement.
You might be thinking “I know I need to trust my intuition. But how do I do that?” Try out the steps below, in the order that intuitively feels right to you.
T - Talk to your intuition. Ask your intuition a question. Get in touch with it.
R - Rest your mind. Your mind can get in the way of hearing an intuitive insight. Give your self the space to clear your mind and listen to your inner messages. Spend time in nature, meditate, do yoga or something with a rhythm to it, like taking a shower, going for a walk, or listening to peaceful music.
U - Un-know. Let go of the need to know. You may understand your intuitive message, or it may ask you to leap into the unknown. It’s not important to understand the “why” or the result you’ll gain by taking action on your intuition. S - Suspend judgment. Intuition isn’t good or bad. It’s purely a message from your own inner wisdom. T - Take action. Until you take action on the messages you receive, your intuition can’t work its magic in your life.
Using your intuition will lead you in new directions and open a door that you might not have otherwise opened. Trusting your intuition is the key that unlocks the door, and acting on it allows you to walk through the doorway to a new opportunity. Trust your intuition and watch its power unfold.
Claudette Rowley, coach and author, helps professionals identify and pursue their true purpose and calling in life.
Contact her today for a complimentary consultation at 781-676-5633 or claudette@metavoice.org. Sign up for her free newsletter “Insights for the Savvy” at http://www.metavoice.org.
