The value of your estate can be dramatically trimmed down by the federal estate tax. During the current calendar year the estate tax exclusion is $5.25 million, and the maximum rate of the tax is 40%.
We have a gift tax in place as well. This gift tax is unified with the estate tax. So this lifetime $5.25 million exclusion applies to the combination of the taxable gifts that you give throughout your life coupled with the taxable value of your estate.
In addition to the unified lifetime exclusion there is an annual gift tax exclusion that exists independent of the unified exclusion. You may give gifts to any number of people that you choose totaling as much is $14,000 in a tax year without incurring gift tax liability.
If you are interested in reducing the taxable value of your estate as you assist a family member with educational expenses you may want to consider contributing into a 529 plan. With a 529 savings plan that is offered by a state the assets are invested, much like assets that have been placed into an individual retirement account.
You name a beneficiary, and this student will be able to tap into the funds in the account to pay for college expenses. The growth of the assets that were placed into the account will not be taxed as long as the beneficiary is using the money for approved purposes.
The gift tax is applicable on your contributions into the plan. But, if you stay within the aforementioned $14,000 annual exclusion amount you can fund it incrementally without incurring any tax liability.
It is also possible to make a single contribution of up to $70,000 tax-free using your annual exclusion over a multiple-year period.
Larry Parman
Author, President and Founding Attorney
Parman & Easterday
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