With commencement ceremonies for high school seniors coming up, many parents and grandparents are contemplating making cash gifts the student can use for college expenses. But if gift and estate taxes are a concern, Sandersen Knox & Company suggests considering a potentially more tax-efficient gift: paying some of the child’s college tuition.
Cash gifts to an individual generally are subject to gift tax unless you apply your $14,000 per beneficiary annual exclusion or use part of your $5.25 million lifetime gift tax exemption (which will reduce the estate tax exemption available at your death dollar-for-dollar). Gifts to grandchildren are generally also subject to the generation-skipping transfer (GST) tax unless, again, you apply your $14,000 annual exclusion or use part of your $5.25 million GST tax exemption.
But tuition payments you make directly to the educational institution are tax-free without using any of your exclusions or exemptions, preserving them for other asset transfers. If you’d like to learn more about tax-smart ways to fund education expenses or make gifts to reduce your taxable estate, please contact us.