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Estate Planning
Key Tax and Estate Planning Strategies in Saving For Your Children's and Grandchildren's Education
Saving for your children's education does not have to be an all or nothing proposition, or even an "expensive" project on a month-to-month basis. As we all know, the same keys apply to retirement as they do to saving for your children's education. Thus, even a few pennies set aside every day, week or month can add to a considerable kitty in the long run for children's education. Additionally, grandparents are discovering that they can create incredible financial and legal mechanisms to provide for their grandchildren as well as great-grandchildren's educational needs. The purpose of this article is to highlight some of the tax preferred methods available to taxpayers that can help leverage those dollars being saved for college.
As a preliminary matter, we realize some individuals may think that to save for children's or grandchildren's college will "spoil" the recipient, or believe that it is unnecessary because it was a benefit they didn't receive while they were going through school, so why should the child receive such a windfall. Truly, these are valid concerns. However, it is also a fact that education is becoming more and more expensive. Even with some type of supplemental educational plan in place, a secondary education is a sacrifice and will require the student to work considerably harder and also put away their own savings to hopefully obtain that college degree. We are proud that our country has one of the highest per capita levels of higher educated adults in the world. Moreover, many individuals travel from all over the work to take part in the educational system that we have built in this country.
Most recently, IRS regulations have been modified to provide one the most effective, efficient and exciting methods to save for your children's education. IRS Section 529 Plans are higher education savings programs providing tax deferred benefits that provide a larger receptacle than the typical Educational IRA to place a considerable amount of funds away for your posterity's educational needs in the future. It is very difficult to summarize all of the benefits and options available to a person utilizing a 529 Plan, however, the following are some of the benefits available, (i) tax deferred earnings on all monies placed in the 529 Plan, (ii) special gift and estate tax treatment allowing individuals to place money in the plan over and above the annual exclusion of $11,000.00, and (iii) anyone can invest in a 529 Plan for the benefit of any beneficiary (whether a family member or not). Additionally, there are very low minimum investment amounts required to get started (sometimes as low as $50.00), but also high contribution limits are available where beneficiaries can have donated on their behalf up to $246,000.00 from wherever the source my come. Flexibility allows for the donator to change beneficiaries at any time and allow the funds to be provided for not only children but also grandchildren and great-grandchildren, even if they are not born yet. In sum, the 529 Plan is certainly a viable option for anybody considering an aggressive plan for college savings.
Whatever method is used to save for children's education, an Educational Trust should certainly be considered. This type of trust can be created to receive money now or with life insurance and coordinate all of an individual's goals in regards to their family's educational needs. For example, an Educational Trust can maintain an educational plan for your children, even after your death, last in perpetuity for grandchildren and great-grandchildren, and can provide for subsequent trustees and ultimate beneficiaries of the funds. The reality is, that these types of Trusts can provide significant benefits and individuals should consult with an expert in this area before embarking on an extensive educational savings plan.
What can I do now? Congress has passed several pieces of legislation that can assist those that have educational expenses now or right around the corner. The following should be considered carefully:
- Hope and Lifetime Learning Credit. The Hope Credit provides a maximum credit of $1,500.00 per student. The Lifetime Learning Credit allows a credit of 20% of qualified tuition expenses paid by the taxpayer for any year the Hope Credit is not claimed.
- Educational IRA's.
- Interest deduction on student loans.
- Grants and scholarships.
- Federally subsidized student loans.
- Exclusion for employer-provided education.
- Exclusion for scholarships and fellowships.
- No 10% penalty on early withdrawals from IRA's used to pay higher education.
- Education expenses to maintain or improve a skill required by the employer.
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