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What’s the best way to fund a grandchild’s college education?

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in Small Business Tax,Small Business Tax Deduction Strategies

K.D. from Las Vegas, NV, writes:

Q. My parents want to give my sister and me $150,000 each to help pay for our children's college expenses. (My sister and I have a total of five kids.) But the gift would come in the form of stock shares. Won't we owe a lot of tax when we sell the stock? And won't my parents have to pay gift tax? Is there a better way to handle this?

A.
First, you should feel fortunate to have such generous parents. Second, you will owe tax on the stock sale, based on the share's original cost. In other words, you'll assume your parent's basis in the stock. If your parents bought the stock a long time ago, the taxable gain could be big, even though the federal long-term capital gains tax rate is down to a maximum 15 percent.
 

Instead, it's smarter for your parents to keep the stock and give you cash instead, if that's possible. To minimize the tax hit, they could also make gifts of property that hasn't appreciated. If your parents don't have the cash on hand, they can also sell the stock themselves and give you the proceeds. (In that case, they'd owe tax at a maximum 15 percent rate.)
 

Regarding the gift-tax issue, the annual gift tax exclusion allows your parents to each shelter gifts to you of up to $11,000 per year ($22,000 for gifts made by a married couple). Ditto for gifts to your sister.
 

Although the gifts will be sheltered by the $1 million gift-tax exemption, giving a lump-sum gift may create estate tax repercussions later on. Instead, it's advisable for your parents to give a series of gifts to you and your sister, as well as the five grandchildren, to maximize the benefits of the annual gift tax exclusion.
 

Your parents have a few other alternatives to consider. For instance, they might establish and fund Section 529 college-savings plan accounts for each grandchild. Or they can pay the tuition for the grandchildren directly to the colleges. Such direct-tuition gifts are allowed in addition to the annual gift tax exclusion.

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