Bonus Gift Exclusion
As we all know, there is an annual gift tax exclusion, currently $16,000. Meaning an individual can gift up to $16,000 to as many individuals as they would like without impacting their lifetime estate tax exclusion. What is frequently overlooked is the ability for a donor to make gifts (with no specific dollar limitation) that are totally excluded from the gift tax in the following circumstances:
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Payments made directly (Sec 529 plans are not direct) to an educational institution for tuition. This includes college and private primary education. It does not include books or room and board.
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Payments made directly to any person or entity providing medical care for the donee.
In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify. The tuition/medical exclusion is often overlooked, but these expenses can be quite significant.
Consider a grandparent has fully funded a Sec 529 plan for child. Sec 529 distributions can be used for tuition, books, supplies, computers, and certain room and board expenses. However, this bonus gift tax exception only applies to tuition. So, use the Sec 529 plan funds for the other expenses and pay the tuition directly.
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Parents and grandparents interested in estate value reduction should strongly consider these gifts.