Skirting estate taxes while helping pay your child's college expenses
There's a unique way to fund your child or grandchild's college education and receive a sizable estate-tax break to boot. Qualified State Tuition Programs, basically tuition savings plans with an estate planning component, are just now attracting attention. Thanks to a small but powerful section of the 1997 tax law, these plans allow you to make tax-free gifts and still keep control of the account--which means Junior can't blow the money on a shiny new sports car if he decides to skip college.
Even better, your contributions count as a completed gift. This means if you die before the money in the account is used, it isn't counted as part of your taxable estate.
Money in the savings account grows tax-deferred until the student begins to withdraw it to pay for tuition and other education costs. Earnings from the account are then taxed at the student's tax rate.
As has been the case for quite some time, taxpayers are able to give up to $10,000 per year tax free ($20,000 for a couple) to each beneficiary they designate. But annual gifts greater than these amounts count against the lifetime gift tax and estate tax exemption. With this new savings plan, the donor can put $40,000 into a college savings account for a child or grandchild immediately and have it count as the next four years' $10,000 gifts. In addition, the future appreciation on that amount is in the beneficiary's account rather than the donor's estate.
By the end of the year, 43 states will offer these plans through brokers and banks, and more are sure to follow. Currently participating states include Connecticut, Delaware, Indiana, Iowa, Montana, New Hampshire, New Jersey, New York, Rhode Island and Tennessee. Check with the treasurers in each state for specific details.
Some states' plans allow you to change the beneficiary or take the money back if you need to do so. If you die within five years of giving the money, a prorated amount would be placed back into your estate.
Surprisingly, this remains a little-known tax benefit that could save you a bundle in estate taxes, while helping to pay for your children's and grandchildren's education. It's well worth checking out.
David Berdon & Co. LLP, (212) 832-0400, http://www.dberdon.com