Caring for our children and grandchildren and ensuring they receive a good education are paramount issues for most of us. However cumbersome the IRS tax code might be, there are some bright spots recently added and possibly disappearing to help us make sure we’re providing both in an effective tax-oriented manner. Let us take a look at a couple.
Recently, most states have finalized a new option for those with special needs children. The ABLE accounts provide an individual way to fund the future care of a loved one who is disabled by providing them with tax free funds, which are also exempt for computing the individual’s governmental assistance programs amounts. These accounts can be funded up to $28,000 by parents per year tax free and can grow tax free with qualified distributions for such things as education, health care, transportation and even living expenses. Each state is required to set up the management of these accounts (similar to the 529 educational accounts). Organizing a savings structure in this manner can save thousands as you prepare for long term support of your disabled loved ones.
We all know higher education can be costly and create a huge burden not only on some families but usually on the graduate as well. For those grandparents lucky enough to have wealth, helping that college student may mean more taxes than you bargain for thanks to our estate tax, gift tax and generation skipping tax (GST) laws. How can you avoid the 55 percent estate and 40 percent GST taxes? A HEET may be the answer. This trust, the Higher Education Exclusion Trust, avoids these taxes when the funds are paid directly to a charitable organization (the grandchild’s school or other non-profit). Monies placed into a HEET could avoid the grandparents’ estate, and since they are paid not directly to the grandchild, they avoid the GST as well. The income would grow in the trust and any payment to the non-profit/school would be deductible by the trust.
While the IRS code adds options such as ABLE, the current administration has proposed regulations which will eliminate the HEET.
With some new options coming on line and some possibly disappearing, now might just be the time to act on tax planning. At Reilly, Penner, & Benton, we are here to help you think of new and creative ways to help minimize taxes so you can have more to give to those you care about.
Article by: Brad Voght, C.P.A.