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Down Market Opportunities
A Family Shares the Value of Education Among Generations
Parents and grandparents can work together to secure education funding for the next generation by maximizing the annual and lifetime gift and estate tax exclusions allowed by U.S. regulation while taking advantage of depressed asset values.
- Frontloading tax-efficient accounts, such as those created for education savings, with a lump sum can outperform incremental contributions.
- Lifetime exemptions ($12.92 million per individual for 2023, an increase from $12.06 million in 2022) are indexed to inflation, so check with your advisor about whether you have accounted for your entire exemption, or if there is any that you could gift to younger family members.
- Planning for the rising cost of education provides age-appropriate opportunities for younger generations to learn about the importance of saving for their future.
Here is how one family put their values into action by maximizing multiple generations’ contribution to education savings. This series offers examples of families shifting assets among generations to make the most out of a difficult market. Read the rest here.
Situation
Planning early to fund education
Situation
Planning early to fund education
Susie, Joe, and their two school-age children live comfortably on the couple’s income.
But Joe and Susie worry they are not saving enough for their children’s future education. Susie’s parents, Ron and Linda, are passionate about education and want to help fund their grandchildren’s educational expenses as part of their overall wealth transfer plan.
At Ron’s suggestion, Susie and Joe meet with her parents’ advisor to discuss her goals and how her assets can be used to fund those goals. They want to save enough for the future, but also have more immediate goals to travel and support extracurricular activities and cultural experiences for their kids. With all of their assets and goals quantified, Susie and Joe were disappointed to discover they would indeed fall short of funding education goals, especially if either child chose to pursue private high school education in addition to undergraduate and graduate degrees.
Ron and Linda’s perspective
“Investing in Susie’s education helped her become the person she is and created the foundation for the happy life she shares with Joe and their family now — we couldn’t be prouder of her. We know Susie and Joe don’t ‘need help,’ but we have plenty, so we would love to set our grandchildren up for their own successful future.”
Susie and Joe’s perspective
“It is difficult to know how much our kids will need as they advance through their educational journey. Although we are not comfortable accepting help to fund our day-to-day lifestyle, it is clear everyone will benefit from a collaborative plan to pay for the kids’ future educational needs.”
Solution
Getting a jumpstart on education savings
Solution
Getting a jumpstart on education savings
At their next estate plan review, Ron and Linda asked their advisor about tax-efficient methods to support family members’ education.
Their advisor suggested a dual approach:
1. Frontload a 529 plan, known officially as qualified tuition plans - Ron and Linda were able to combine up to five years of annual exclusion gifts into a single year’s contribution. The annual federal gift tax exclusion allows individuals to give away up to $17,000 in 2023 to unlimited recipients without those gifts counting against their $12.92 million lifetime exemption. By frontloading the account with five years of gifts, Ron and Linda could jumpstart the growth of the account’s investments with more time for compounding returns, plus the added advantage of buying assets at depressed values.
2. Fund an educational trust – Ron and Linda plan to apply an unused portion of their lifetime exemption, the amount of their estate not subject to taxes upon transfer, which grows yearly with inflation, to set up an educational trust with cash that can also be invested at depressed prices. They structured the trust to benefit their existing and future grandchildren by funding education and healthcare expenses.
Outcome
Surplus returns from frontloading
Outcome
Surplus returns from frontloading
Ron and Linda combined five years of annual gift exclusions into a lump sum of $85,000 for each child.
Assuming a 6% annual return, at the end of 10 years each account will have grown to $224,408. That’s $16,284 more than if the family had contributed the annual maximum one year at a time over a five-year period.
The math
Making the most of gift and estate tax exemptions
The flexible structure of qualified tuition plans allowed Ron and Linda’s gifts to be used for a variety of educational expenses, wherever their grandchildren’s interests and aptitude take them, including tuition for secondary school or college. The account also offers other relatives and friends an option to explicitly support education with their gifts.
Using the option to frontload a tax-efficient account with five years of annual tax-excluded gifts, Ron and Linda were able to jumpstart the account’s growth. At the end of 10 years, a front-loaded account will have grown by almost the value of a year’s contribution, compared with an account funded with five annual contributions.
Lifetime exemptions, indexed to inflation, allow an additional $860,000 per individual to be moved outside of Ron and Linda’s estate in 2023 (assuming they have maximized their currently available lifetime exemption). They will be able to use this exemption amount to fund an educational trust, assuring that their younger family members have access to an additional $1.72 million, plus returns, to devote to educational expenses, regardless of future changes to the exclusion limit.
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