ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, December 23, 1996 TAG: 9612230119
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: Money Matters
SOURCE: MAG POFF
Q: Virginia officials are promoting their new Prepaid Educational Program as a good way for grandparents to finance a college education for their grandchildren. We might be interested in doing this for our grandchildren, but we were wondering about the tax consequences, especially estate and gift taxes.
A: Grandparents, or others using the Higher Education Tuition Trust Fund to pay for a college education, face tax ramifications that should be considered before setting aside this money. The deadline for making such a contribution is Feb.28.
Charles Equi, a certified public accountant with the Roanoke firm of Budd, Ammen & Co., noted there is an annual gift exclusion of $10,000 a year for any person giving a gift to any other person. Furthermore, he said, there is an unlimited exclusion for voluntary payments by a donor that qualify for medical and educational expenses for the benefit of the donee.
When a tuition payment is made to the college from the prepaid plan, Equi said, it will be treated as a qualified transfer. Virginia's Prepaid Educational Program is recognized as a qualified state tuition program exempt from federal taxation.
However, Equi said, any gifts made to a qualified state plan will be considered an incomplete gift until the gift (payment) is distributed from the plan to the qualified college or university.
Also, he said, any gifts (or contributions) made by the donor will be included in his or her estate, along with any earnings, if the donor (or contributor) dies before distributions are made out of the plan.
The key to having the gift exempt is current payment to the qualified institution, Equi said.
What this law means, he said, is that your gift to a prepaid program will not be exempt until the child enters college and payments are made to that college from the prepaid plan.
In short, the gift tax is determined at the time of distribution from the plan.
Equi said this leaves some planning opportunities that need to be decided before the end of 1996.
The simplest way to avoid this tax trap is to give the money to the child or guardian and let them make the payment to the prepaid plan, Equi said.
But under Virginia's Four-Year University plan, he noted, single payment plans are all over the $10,000 annual limit. Consequently, in order to stay within the $10,000 annual limit, two gifts are required. One should be made in 1996 and the other in 1997.
Equi gave the following example:
Grandmother, who is a widow, wants to help pay for her granddaughter's college education. The granddaughter was a 5-year-old as of Sept. 1, 1996, the date set by Virginia to figure the projected college cost.
A single payment to pay for four years of college in this instance is $15,537. The grandmother gives the entire amount to the prepaid program.
Suppose, then, that the grandmother dies Sept. 1, 2006, when the granddaughter is a sophomore in high school. The grandmother would have to have the $15,537, plus any earnings, included in her estate, which could be taxed as high as 55 percent.
To avoid this situation, Equi said, the grandmother could give $10,000 in 1996 and $5,537 early in 1997 to her granddaughter or the child's guardian. The total payment of $15,537 could be made to Virginia's prepaid program in 1997 by the guardian (presumably the parent) without any gift or estate tax ramifications.
Although estates of less than $600,000 are not taxable, Equi said, it would be wiser to give the money to prevent any unknown future consequences.
If there are two grandparents, such as a married couple, they could give jointly a total of $20,000 to the grandchild in 1996 or 1997, Equi said. Again, there would be no gift or estate taxes.
Whether you choose to invest yourself or to be a part of Virginia Prepaid Education Program, Equi said, you may want to obtain professional assistance to determine the most beneficial plan of action for your family needs.
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