People who are in a position to give life-changing amounts of money to their loved ones after they pass away face a couple of different challenges. For one, there is the matter of the estate tax. At the present time the estate tax exclusion is $5 million and the rate of the tax is 35%, so any portion of your estate that exceeds $5 million will be shaved down by over a third if you don’t take action to prevent it. If this wasn’t bad enough, the tax relief act that was passed at the end of last year is scheduled to expire at the end of 2012. If it does so without any additional changes taking place the rate of the tax will rise to 55% and the exclusion will be reduced to $1 million.
The other challenge we are highlighting involves the potential for giving a young family member too much too fast and in the process preventing this person from reaching his or her full potential. One possible course of action that could be taken to address both issues would be to offer the gift of education to your young heirs while you are still alive.
From an estate tax perspective, the taxable value of your estate would be reduced by the amount of the educational gifts that you give. There is a gift tax in place that is unified with the estate tax so if you use the unified gift/estate tax exclusion to give gifts it reduces your estate tax cushion. However, educational gifts are exempt from the gift tax and they do not impact your unified exclusion.
When you make this offer to your loved ones you are giving them an opportunity to reach their full potential. And at the same time you’re getting some insight into their thought processes that could be useful when you are deciding on how to provide for each of your family members after you pass away.