There is a little known combination of the gift tax and also the Section 529 Plan that everybody should know, especially those who have either wealthy parents or wealthy grandparents. I hope all of you remember that a gift of up $14,000 can be given away without incurring a taxable event according to the IRS, right? Nod your head yes…
The govt will allow you to use up to 5 years at once, IF it is given to a Section 529 Plan that will be used for education. Since 2 parents or grandparents can each give a child $14,000, you’re talking about being able to start a child’s college education fund off with $140,000 (2 x 14,000 x 5). The catch is you cannot then give them any gifts for another 5 years. Here’s another situation, if you have 5 grandchildren, then you can give the same $140,000 to them, but together as a whole, not each. In other words you can’t give away $700,000 (5 x $140,000) at once.
The whole point of allowing this is to jump start a college savings plan. These funds will then grow tax free until they are needed for college. If your family is able to start your college fund off with $140k from the beginning. Watch out Harvard, here they come! By the time junior graduates from high school s/he will have amassed around $500,000 for school assuming you invest it wisely and can get a 7.2% return on average. Be nice to your grandparents kids!
This benefits the parents and grandparents because it now takes the $140,000 out of their taxable estate, thus paying less in death taxes. Keeping it in the family is a wonderful thing.