Each year, an individual can gift up for $15,000 (“annual gift exclusion”) per donee for 2019 and 2020 without using any portion of their lifetime exemption. There are circumstances, however where you can pay certain expenses on behalf of an individual, without even using a portion of that $15,000. The cost of tuition is one of those items.
IRC §2503(e) specifically excludes educational expenses from the definition of a taxable gift, as long as the transfer is “qualified”. A “qualified” transfer is any amount paid to a qualified educational organization described in §170(b)(1)(A)(ii) providing the payments are made directly to the educational organization. As a result, an individual can pay tuition expenses on behalf of another without 1.) the requirement to file a gift tax return 2.) utilizing their $15,000 annual gift exclusion and 3.) utilizing their lifetime exemption.
Example: Recently widowed grandmother (“GM”) would like to reduce her potential Federal Estate Tax and transfer excess cash to her children and grandchildren (GC). GM, however, has already gifted the maximum lifetime exclusion amount (in excess of $11M) over the past number of years to various family trusts for the benefit of her 2 children and 4 grandchildren. GM can always give $15,000 to each, but that would only remove $90,000 per year ($15,000 x 6). Coincidentally, all 4 GC will be attending college in the upcoming year. Assume each GC tuition costs are $20,000 each, GM can pay the tuition costs directly to the college and remove (in year 1), $170,000 (tuition $20,000 x 4, plus annual gift exclusions $15,000 x 6). After 4 years of college, GM could potentially remove $680,000 out of her estate (Estate Tax savings of $272,000) without ever filing a gift tax return.
Obviously, every taxpayer’s situation is different and should be discussed with their professional/WG advisors to ensure their ultimate objectives are accomplished.
For more information, or if you have any questions about this or any other tax matter, please contact your WilkinGuttenplan advisor.