The Gift Of Education & The Estate Tax

The headline news as 2010 became 2011 in the estate planning community was the tax relief measure that was passed through Congress on December 16 and signed into law by the president on the very next day. As we heard from every major news outlet the Bush era tax cuts were extended and the payroll tax was reduced by almost a third for 2011. This was the lead story in general, but in estate planning circles other provisions of the new Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 were the prime attention getters.

Going forward for the next two years the rate of the estate tax is 35% rather than the 55% we would have been facing had this bill not made it past the president’s desk. In addition, the estate tax exclusion was increased to $5 million per individual instead of the $1 million exclusion that would’ve been reinstated, the same exclusion as existed in 2001.

This is all well and good and if you’re like most people you will take all of the tax relief you can get though many people have some serious problems with the logic behind estate tax. But if your estate is worth more than $5 million you must take steps to gain tax efficiency or watch the portion that exceeds the exclusion be reduced by more than a third.

One way to reduce the value of your estate in an effort to gain tax efficiency is through the practice of tax-free gifting. There are a handful of exemptions that can be utilized that do not impact your lifetime unified exclusion and one of them involves educational gift giving. You can pay the tuition of an unlimited number of students equaling any sum of money free of the gift tax. It should be noted that these gifts must be paid directly to the institution and not to the student and can only cover tuition, not books, fees, and other expenses.

When you consider the cost of higher education today you can see how the utilization of this exemption can go a long way toward reducing the overall value of your estate for estate tax purposes. And to make this strategy a complete win-win you are also providing some of your loved ones with a clear-cut pathway to their own hard-won personal success.

Larry Parman
Founding Attorney