Study Plans

Tax rules, funding tuition bills and more.
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4 min read

This story appears in the July 2006 issue of Entrepreneur. Subscribe »

Funding tuition bills--long a tax-efficient way to pass money on to future generations--just got a boost as an estate-planning tool.

A recent IRS ruling suggests that taxpayers can not only contribute to annual tuition costs without incurring estate and gift taxes, but can also contribute tuition for several years at once, says Susan C. Frunzi, a partner at law firm Schulte Roth & Zabel LLP in New York City. "There's always been an exemption from gift tax and generation-skipping tax for tuition paid directly to a school," says Frunzi. "But this ruling clarifies that you can prepay tuition for multiple years and still qualify for the exemption."

With tuition bills skyrocketing, four years of tuition can easily add up to $200,000 or more--making the prepayment option a great way for relatives of private school- and college-bound kids to save significantly in estate taxes. The method is particularly apropos for wealthy taxpayers who want to fund a student's tuition but fear that they won't live long enough to pay the bills as they become due.

But prepayment comes with a caveat. "These payments are nonrefundable, so if the student drops out of school or transfers, you won't get your money back," says Frunzi, who notes that the school's policy on prepayment should be carefully scrutinized. "For example, you'll want to know whether you lock in the tuition rate or are responsible for tuition increases, and [whether] the taxpayer gets credit for interest earned on the prepaid money. Ideally, a taxpayer's lawyer should look over the terms of the agreement."

Board Games

U.S. director compensation continues to soar annually--2005 figures were up a hefty 14 percent from 2004 and 64 percent from 2000, according to executive search firm Spencer Stuart's 2005 Board Index. Those double-digit increases don't bode well for early stage companies seeking director candidates, says Phil Johnston, managing director of the company's San Francisco office. "Essentially, [small and large companies] are looking at the same pool of candidates," he explains. "So when people see compensation rising at large, established companies, they expect to be reasonably paid to serve on the boards of smaller, growing ones, too."

The turbulent IPO market of recent years has also played a role in raising cash demands, spurring potential directors to require a portion of their compensation in cash instead of just equity. "A few years ago, they wanted all the equity they could get," reports Johns-ton, who points out that serving on the board of a young company can be demanding. "But since then, many people have served for years on boards that still haven't had a liquid-ity event. Now many great directors won't go for equity-only board compensation. That's the biggest change we've seen post-2000."

But Johnston is quick to add that early stage and pre-IPO companies seeking to fill board seats should not despair. The IPO market is beginning to swell, which may lead back to equity orientation. "And there are always directors who gravitate toward the hands-on excitement of an earlier-stage company," he says. "They like to be on the cutting edge; they don't care as much about the compensation."

Financial Frontier

Thanks to NASA, starry-eyed technology entrepreneurs will soon have a new potential funding source. Tentatively dubbed Red Planet Capital, the initiative will be modeled after In-Q-Tel, the private nonprofit funded by the CIA that works with entrepreneurs, established companies, universities, researchers and VCs to develop technologies that serve U.S. interests.

"The goal for NASA is to be able to support emerging, innovative technologies that will help us with our space missions, such as setting up a permanent moon base and embarking on journeys to places like Mars," explains NASA's Melissa Mathews. She says NASA has earmarked $11 million for the initiative in 2006 and will eventually up that amount to $20 million per year. "The kinds of technologies we're interested in include water recycling, communications and biomedical support, among others."

Like In-Q-Tel--which reportedly couples every $1 it invests with $3 of private capital--Red Planet Capital will leverage its own funding capital by investing in syndication with existing private-sector corporate and financial venture funds.

"Our objective is to support technologies to meet our future mission needs, achieve sustained positive financial returns and better position these technologies for future commercial use," explains Mathews. "The In-Q-Tel model illustrates this is possible for a relatively small investment."

While the fund is currently still under development, NASA plans to begin making investments by the end of 2006, according to Mathews: "We'd like to get the fund operational by summer and have investments in place before the end of the fiscal year."

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