With neither of you having had the benefit of a college education, you’re proud of the fact that both your children and now your one grandchild are all college graduates. In fact, your granddaughter is planning to continue her studies, working towards a medical degree.
Retired three years now, you are not in a position to finance the entire cost of grad school, but you would like to help out in a significant way. You’ve been told that you are each allowed to make a once-a-year gift of $17,000 ($34,000 combined) without being subject to gift and estate tax, but you would like to give her $60,000 this year, reserving the decision about the amount of future gifts.
You’re not terribly concerned about the additional gift and estate tax (you don’t have a large enough estate for this to ultimately present a problem), but you would like to avoid filling out a gift tax return. Of equally important concern is choosing which accounts to draw from. With your home long fully paid for, your regular income has been coming from two fixed life annuities and through systematic withdrawals from each of your retirement accounts. You do have six figures in liquid and semi-liquid investment accounts.
While we offer no tax-related advice, we can refer you to the Gift Tax Education Exclusion for Tuition. To qualify for that exclusion, you should make the tuition payment directly to your granddaughter’s school.
From which of your accounts should the money be drawn? Consider using your housing wealth by setting up a reverse mortgage line of credit. With no monthly mortgage payments due (the home itself serves as sole collateral for the loan), you’ll be able to decide on the amount and the timing of each gift you choose to make. Meanwhile, whatever portion of your home equity has not been tapped will continue to be credited with growth at the same rate as that being charged on the loan.
Is there a doctor in the house? “Not yet,” you’ll be able to say, “but, with our help, there soon will be!”