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Direct Payments of Tuition and Medical Expenses Can Reduce Future Estate Tax Exposure

09.06.16 | T&E Chat

The gift and estate tax exemption at $5.45 million in 2016 may make you less concerned about these taxes. Nonetheless, you may be missing a valuable opportunity to reduce your potential gift and estate tax exposure down the road if you don’t take advantage of making tax-free direct payments of tuition and medical expenses.

Leveraging the break

Federal tax law allows you to pay tuition and medical expenses on behalf of your children or other loved ones without incurring gift tax or using up any of your gift and estate tax exemption. This opportunity may not be important at the moment if your net worth is well under the current exemption amount, but what if your wealth grows beyond the exemption amount in the coming years?  What if lawmakers decide to reduce the exemption? Either way, your estate could end up with a hefty tax bill, leaving less for your family after your death.

You may already be making $14,000 per recipient annual exclusion gifts to your children, grandchildren, or other loved ones, which can help minimize your taxable estate. But if estate tax is a concern, also consider paying some or all of their tuition and medical expenses. Unlike the annual exclusion, there’s no limit on the amount of tuition or medical expenses you can pay tax-free. It’s a powerful technique for transferring wealth gift-tax-free while also reducing the size of your estate.

Making direct payments is critical

Be careful to follow the rules:

  • You must make payments directly to a qualifying educational institution or medical provider. Advancing the funds to a loved one or reimbursing previously paid expenses doesn’t count.
  • The break covers tuition at all grade levels, but does not cover payments for room and board, books, supplies, or other non-tuition expenses.
  • The break does not apply to medical expenses reimbursed by insurance.

We can help ensure that you’re taking full advantage of your $5.45 million gift and estate tax exemption. Get in touch with me at SDitman@berdonllp.com or your Berdon advisor today.

Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.