Tuesday, November 19, 2013

The Gift of Education

In the National Law Review, Terri Stallard, a Kentucky estate planning attorney talks about ways grandparents can give to their grandchildren.

Many grandparents want to enrich the lives of their grandkids, but are not sure the best way to accomplish this with their estate plan. I encourage clients to consider helping their grandchildren with the future costs of education. The proper planning can help grandkids avoid hefty loans and be tax-efficient for the donor.

A grandparent may currently gift up to $14,000 per grandchild (or to anyone) per year tax free ($28,000 if a married couple gift-splits). Any gift over that amount requires the filing of a gift tax return.

However, if you pay for a grandchild's education expenses directly to the provider (i.e., educational institution), the gift is excluded from your annual exclusion amount. For purposes of this exclusion, the term "educational institution" covers a broad range of schooling, such as primary, preparatory, vocational or university institutions. This kind of payment is also exempt from the generation-skipping tax (which is too complicated to explain herein, but can significantly reduce a grandparent's gifting amount). In short, if you pay $40,000 to cover your grandchild's tuition directly to the school, you can still gift up to $14,000 tax free to him or her in the same year. Some institutions may even allow a donor to pay upfront the applicable years of education at a locked-in tuition rate, so as to avoid rate hikes.

Another option to consider is a 529 college-savings plan. One of the biggest benefits of this plan is that it can continue operation when the grandparent is no longer around to write checks to an institution. A grandparent can gift up to the annual exclusion per year tax free, or make up to five years' worth of the annual exclusion gift ($70,000 per single donor or $140,000 per couple) in one year to benefit a single individual. However, this has its drawbacks. If you gift the five year maximum amount in one year, any other annual exclusion gifts to that beneficiary for the next five years will incur gift tax consequences. Further, if you die within five years of the date of the gift, a prorated portion of the gift will be included in the estate tax calculation.

Friday, November 8, 2013

Planning can help prevent estate tax issues

Many families, planning for a transfer of wealth is something they may think about, but never take the time to act upon. Unfortunately, this failure to establish a proper estate plan can significantly affect a family's long term financial stability and can lead to the payment of substantial estate taxes. Although this can be difficult for many families to understand - indeed, it can be a challenge to set plans for events that may not occur for many years. The following article written by Law Offices of Connie Yi, PC (an estate planning law firm in Alameda county)  -illustrates with the example of the recent death of a celebrity - just how important it is to work with a professional to craft an estate plan.

When actor James Gandolfini, best known for his role as Tony Soprano in The Sopranos, died in Italy earlier this year, it took many people by surprise. While his family and his fans mourned, reports arose indicating that nearly half of Gandolfini's estate, worth approximately $70 million, was set to be paid in estate taxes. Unfortunately, it appeared that Gandolfini, who was survived by his wife and two young children, had not taken steps to draft an estate plan that would have ensured the maximum transfer of his wealth to his family.

As further reports surfaced, experts determined that their initial assessment of Gandolfini's estate had been based on incomplete information. In fact, many people had estimated the actor's estate tax bill based solely on assets listed in his will. Fortunately, Gandolfini had taken the time to work with professionals to set up other estate planning vehicles. Although specifics have not been made public, many believe that Gandolfini had made arrangements for members of his family to have access to funds held in irrevocable trusts, life insurance policies and other accounts. At the end of 2012, Gandolfini had even drafted a new will designed to take advantage of the federal gift tax exemption, worth $5.12 million, that expired at the end of that year. It appears that early estimates that the actor owed approximately $30 million in estate taxes were significantly overstated.

Gandolfini's estate was larger than most families in the U.S., but case illustrates an important point for everyone. It is not enough to hope that everything turns out for the best when it comes to transfers of wealth. No matter the size of the estate, planning is essential. This may involve not only drafting a will, but also trusts, retirement accounts and other vehicles, as well.

For more information, contact an attorney like myself who specializes in estate planning, who can explain your options and help you achieve your goals.