Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 9, 1995 TAG: 9510100038
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
\ AN obscure estate planning tool can do double duty by also helping families to pay for medical bills and college tuition.
"Paying for a college education continues to be a major concern for both parents with children and adults who are retraining and earning advanced degrees," said Charles F. Equi Jr., a certified public accountant with the Roanoke firm of Budd, Ammen & Co.
He said he knows first-hand of this concern "with three children of my own and a wife who has just completed college."
His tax planning tip deals with Section 2503(e) of the United States Code. It has been in effect since 1981.
It states that voluntary payments of medical and educational expenses are exempt from being classified as taxable gifts. In addition, Equi said, generation-skipping transfer taxes are exempt.
"What this code section means," Equi said, "is that any individual is entitled to an unlimited exclusion from gift tax for tuition or medical expenses paid for after 1981 for another individual's tuition or medical expenses."
That makes the section the perfect vehicle for well-to-do grandparents, for instance, to finance their grandchildren's college education or pay their medical bills.
The money is removed from the grandparents' taxable estate in such a case, he said, and the grandparents are still free under tax law to give away up to $10,000 in gifts to anyone they want to every year.
By removing the money from an estate, heirs avoid paying as much as 55 percent - the maximum estate tax rate - of the money they would inherit to the Internal Revenue Service, Equi said.
The donor does need not be a grandparent, however, or even a relative, Equi said. But the payment must be voluntary. It might be considered involuntary, for instance, if a divorce decree or a divorce court ruling requires a parent to pay for a child's medical bills or college tuition.
But without such a decree, a parent is generally not obligated to pay the tuition of a student who is an adult.
Equi said the payment must be made directly to the educational institution or medical care provider.
Full- or part-time students qualify for the college tuition exemption, Equi said. But note that only tuition is exempted. All other costs - books, supplies, room and board - do not qualify.
This tax-avoidance technique not only helps with tuition, Equi said, but it does not affect the annual exclusion from taxes other gifts of cash up to legal limits. The voluntary payments also help the student or ill person who would otherwise wind up with a large debt.
Equi offered several examples.
nA grandparent who wants to help pay for the grandchild's tuition, which is $7,000 for one semester. The grandparent has no legal obligation to make this payment, but goes ahead and pays $7,000 directly to the granddaughter's university. Equi said this gift is exempt from gift tax. The voluntary payment financed the grandchild's education and reduced the amount of money that will be left in the grandparent's taxable estate.
A person wants to pay for a friend's medical costs for a serious illness. The person has no legal obligation to make this payment. He pays $5,000 directly to the friend's hospital and gives the friend another $3,000 to pay off assorted medical bills. In this case, the $5,000 payment directly to the hospital is not a gift and is treated as a qualified payment under the tax law. The $3,000 is considered a gift that qualifies for the $10,000 annual exclusion.
A father wants to pay for his son's education. The father has no legal obligation to make the payment because the son is an adult. The father pays $6,000 directly to a foreign university that is approved in the internal revenue code. Equi said this is not a gift but a qualified payment for tuition.
"What this code section means," Equi said, "is that any individual is entitled to an unlimited exclusion from gift tax for tuition or medical expenses paid for after 1981 for another individual's tuition or medical expenses."
by CNB