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Transfer wealth tax-free: Prepay tuition

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in Small Business Tax

With college and private school tuition continuing to soar, you may be helping to pay your grandchildren’s tuition.

The problem: You’ll typically have to use part of your $1 million lifetime gift-tax exemption when monetary gifts to one person exceed the annual gift-tax exclusion. For 2006, the annual exclusion is $12,000 per gift recipient (up from $11,000 last year).

New strategy: Prepay the tuition directly to the school.

In the past, direct payments often were used to avoid gift tax on transfers in a single year. But a new IRS private ruling says you can prepay tuition costs for multiple years with no gift-tax liability. (IRS LR 200602002)

You can arrange to pay private-school tuition for a child from kindergarten through high school—and possibly even beyond—without using up any of your $1 million exemption or any of your $12,000 annual exclusion, or paying one red cent in gift tax.

Here’s how to do it: If you pay expens...(register to read more)

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