August 2012, Volume 1, Issue 6

A win-win for the kids and for your estate

With the beginning of a new school year comes the excitement of new teachers, new shoes and backpacks, new friends, and the hope that this year will be the best one yet.  Depending on the kid, it may come with a little bit of anxiety and the bittersweet farewell to (relatively) lazy summer days.  With my own children it seems that the anxiety becomes a little more pronounced as they get older.  For parents and grandparents, the new school year also comes with the reminder that, regardless of the ages of your children or grandchildren, the cost of higher education looms ever larger on the horizon. 


Fortunately there are some financial planning and estate planning tools that can help ensure that your family members can avoid being weighed down too heavily by student loans.  Some of these tools also offer benefits to your estate.  When employed properly, the vehicles you can use to make gifts to minors can reduce the value of your estate and remove future appreciation from the estate, thus making it subject to lower estate taxes. Income-generating gifts you provide to minors may also be taxed at a lower rate because the minor beneficiary may be in a lower tax bracket. 


Making an outright gift of cash or other assets, however, won't enable you to take advantage of these estate planning benefits.  In general, there are three types of tools that can provide taxation benefits when making gifts to minors for the purposes of their education.  These are custodial accounts, 529 plans, and trusts. Read more>>
Custodial Accounts
This type of tool for gifting assets to minors can be established under the Uniform Transfer of to Minors Act ("UTMA").  Through UTMA, a donor establishes an account for a minors benefit and names a custodian.  This custodian can invest funds and use them for education, medical care, support, and other benefits for the minor.  There are some benefits to such custodial accounts, but they may not be the most effective vehicle for maximizing the benefits to the minor or to your own estate planning. Read more>> 
Qualified State Tuition Programs ("529 Plans")

A 529 Plan is specifically designed to help families save for higher education expenses.  These are investment plans operated by individual states that allow contributions to a designated beneficiary.  As with UTMAs, there are both advantages and disadvantages to using 529s to make gifts to minors. Read more>>

In most cases, a trust set up for a minor does not qualify for annual gift tax exclusions.  However, a certain type of trust called a "Crummey trust" offers estate planning and taxation benefits to the donor.  A Crummey trust enables the donor to set conditions such that the trust funds may only be distributed for a certain type of expense, such as education expenses as long as certain conditions are met by the trustee.  Crummey trusts can be a valuable tool for parents and grandparents to make gifts to minors and take advantage of gift tax exclusions.  Read more>>
As you can see, there is no such thing as a "one-size-fits-all" approach to education funding or estate planning.  Call or email our office to let us help you determine the best approach to meet your goals for your family. We are here to answer your questions.
From the Wall Street Journal

Question:  With the annual gift-tax exclusion, which party gets to exclude the gift from taxable income? Is it the recipient?
Answer: The recipient typically doesn't owe Uncle Sam any income tax on that gift-as long as it is truly a gift.  Read more>>
Also, don't forget: The $5.12 million lifetime gift tax exemption is set to expire at the end of this year.  More about that next month.  In the meantime, read more>>
AboutAbout Pierson & Strachan

Pierson & Strachan P.C. is a law firm serving clients throughout Lake and Cook Counties specializing in estate planning and probate, real estate and land use, business law, and other contract matters. From issues that affect your family to those that impact your business, our attorneys combine cutting-edge technology with personal service to vigorously represent your interests and get you the results you need. Read more>>


Our Approach to Billing 

At Pierson & Strachan, we believe that open communication with our clients is imperative to establishing trust and working together effectively.  We know that engaging an attorney is a leap of faith. This is particularly true when it comes to billing and costs.  Our approach to billing eliminates the potential for "sticker shock" that erodes trust.  Read more>>

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This information may address some questions, but is not intended to be a comprehensive analysis of the topic or legal advice.  Independent tax and legal advice is recommended.