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3 ways to gift education while avoiding taxes

SPONSORED — Paying for another person’s education is a noble goal indeed, but unless Uncle Sam is getting his doctorate, you’re probably not looking to throw him any more cash.

The good news is, you can help family members and friends pay for educational expenses without handing over a chunk of the funds to the IRS. However, to avoid paying gift or inheritance taxes now or in the future, you’ll need to be strategic.

Contribute to a 529 account

If your grandkids are still in diapers, you might not be thinking about their future at MIT. That said, it can be highly beneficial — both for you and those toddling tots — if you are. A 529 plan is a college savings account that is exempt from federal taxes, and it’s a great way to gift educational funds while retaining control of the money – and seeing the investment growth.

Currently, you can contribute $14,000 per year – tax-free – to a 529 account. You can donate to as many 529 accounts as you’d like, and the IRS allows you to front-load each account for five years, or with $70,000.

“The great thing about a 529 account is that you’re removing the funds from your taxable estate while retaining control of the funds and seeing the investment grow,” said Kari Brotherton, CPA and estate planning attorney at Ryan, Swanson & Cleveland, PLLC in Seattle. “Plus there are no taxes on the growth either, as long as those funds are used for educational purposes.”

Removing the money from your taxable estate can be a big incentive, since the lifetime gift tax exemption is capped at $5.43 million in 2015, according to Forbes. By using up annual exemption limits ($14,000 per beneficiary per year), you can reduce your estate without touching your lifetime exemption.

Contribute to a Guaranteed Education Tuition plan

A Guaranteed Education Tuition plan is a 529 plan specific to Washington State residents that allows residents to prepay tuition expenses for a beneficiary while guaranteeing the investment increases at the same rate as tuition. This could be beneficial if you have young beneficiaries.

According to www.get.wa.gov, college tuition costs rose 538 percent from 1985 to 2013, well above the Consumer Price Index of 121 percent. By guaranteeing a return based on the rate of tuition inflation, rather than allowing the account owner to control the investment, a 529 GET plan “keeps pace” with tuition costs. The plan is then backed up by a full-faith guarantee from the state of Washington.

Pay directly

If you’ve got family members or friends who are currently in school, you can offload some of your taxable estate simply by writing a check. Payments made directly to an educational institution are exempt from gift taxes, and do not contribute to your annual or lifetime gift tax exemptions. That means you could pay for your grandchild’s tuition and still gift him or her $14,000 cash per year tax-free.

Keep in mind, however, that paying educational expenses could reduce the beneficiary’s eligibility for need-based financial aid, according to FastWeb. Not to mention that you’ll gain a long line of students willing to be adopted grandchildren.

When it comes to paying educational expenses for your loved ones, planning is key.

“By creating an estate plan now, you can reduce your taxable estate and pass on the investment appreciation to your beneficiaries, all while avoiding taxes,” said Brotherton. “A financial planner and estate planning attorney can help you get started.”

Kari Brotherton is the chair of Ryan Swanson’s Estate Planning & Probate Practice Group. Reach her at 206.654.2227 or brotherton@ryanlaw.com.

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