James and Frances have a stock portfolio they have had for two decades which has appreciated significantly over the original purchase costs. They wish to help James, Jr. send his three children, each two years apart, to college. Can James and Frances use stock to help without paying taxes?
Free gifts are those that do not generate estate, gift, income or capital gains tax to the donor. James and Frances’ combined estates are less than $11.3 million, meaning, with proper planning they will owe no estate tax. However, they want to avoid paying gift tax and capital gains on any stock gifted.
James and Frances can use the stock to pay unlimited amounts for tuition for their grandchildren’s education without being taxed. They do have to pay the tuition directly to the school. They cannot give the money to James, Jr. or the children and let them pay the school. Under the Internal Revenue Code. As long as the school being attended qualifies under Internal Revenue Code §170(b)(1)(A)(ii), they could pay for private school tuition at any level, not just college.
The “tax free” benefit applies to tuition alone. It does not apply for other educational expense, such as textbooks, living expenses or meals.
James and Frances can help with college expenses other than tuition through another type of “free gift.” James and Frances can each give an amount of stock equal in value to the annual gift tax exclusion of $15,000.00 to James, Jr., James’ wife, and each of the three children. If they give the maximum amount, they can transfer $150,000.00 worth of stock to James, Jr.’s family without their having to pay capital gains on it. They can repeat gifts up to the annual exclusion amount each year as they desire without their having to pay capital gains tax themselves. If they designate that the stock is to be used for college and the donees comply, mission accomplished.
When a donee sells the gifted stock, he or she will have to pay capital gains in excess of James and Frances’ purchase price and the selling price. As long as the donee has kept the stock for at least a year, the capital gains rate will be based upon the donee’s income. The grandchildren who are still in school will likely have an income less than $39,375, so under current law they will pay 0% capital gains. James, Jr.’s income is less than $434,550.00 so he will pay 15% in capital gains.
Sandra W. Reed is an attorney with Katten & Benson, an Elder Law firm in Fort Worth. She lives in beautiful Somervell County, near Chalk Mountain.