Estate planning for people who have been able to achieve substantial financial success during their lifetimes will include efforts to mitigate estate tax exposure. The estate tax exclusion stands at $5 million right now, but it is scheduled to be reduced to just $1 million at the end of 2012. So if you are pretty sure that you will be alive and kicking once 2013 rolls around and your assets exceed $1 million in total value, you do have to concern yourself with this formidable federal levy.
One simple and direct way to reduce the taxable value of your estate would be to give gifts to your heirs while you are still alive. Of course the IRS is well aware of this so there is a gift tax in place. The gift tax carries the same rate as the estate tax; right now this rate is 35% but it is going up to 55% in 2013 unless Congress changes the law before then.
There are some exemptions you can use to avoid gift taxes, though, and one of them allows an individual to directly pay the school tuition of an individual as a tax-free gift. It should be noted that this exemption only applies to tuition, not books, fees, and living expenses.
However, you may also give as much as $13,000 per year to any number of gift recipients free of the gift tax. So you could choose to use this exemption to provide your student with some additional resources. And, if you are married you and your spouse could combine your respective exemptions and potentially transfer up to $26,000 each year (plus the cost of tuition) to the student free of taxation.
Utilizing this strategy you could provide a young heir with the opportunity to achieve his or her academic potential while reducing taxes in the process.