How to Make A Big Tax-Free Gift to Your Child or Grandchild

Anyone who has considered giving a substantial gift to a child or grandchild has to think about the potential consequences under federal law.  These could include the federal gift tax, estate tax and generation skipping transfer tax.  And we haven't gotten to potential state taxes yet, which don't necessarily work the same way as federal taxes.

But there's a simple workaround to all these taxes:  pay for your child's or grandchild's college education.  The burden of college loans is well-known.  If a student borrows $100,000 for college and/or medical, law, or other graduate school, and pays 8% per year over a 20-year repayment process, the interest costs actually exceed the $100,000 principal amount of the loan (by about $750).  If you contribute $100,000 to that student's education, you just in effect transferred over $200,000 to that student, all without any consequences under federal or state estate, gift or similar laws.  If the student potentially has to borrow larger amounts ($200,000 of educational debt is hardly unusual these days), the amount you can give tax-free to your child or grandchild increases proportionately.

Some parents think it's better to make kids bear the costs of college in order to teach them responsibility.  There are many ways to teach responsibility, and they should begin well before the child reaches college age.  If a kid isn't responsible by age 18, dumping a truckload of student debt on him or her isn't likely to improve the situation. 

If you can't pay the full cost of a kid's education, consider how much you can pay.  Whatever you provide reduces the potential need for loans, and the tax-free gift you give confers lifetime benefits on the kid.  And if you're not wealthy enough to face liability for gift, estate or similar taxes, remember that whatever amount of educational costs you cover still provides a large gift because the child might otherwise have to borrow the money and pay a lot of interest.  Even if you don't get to thumb your nose at the tax man, you give your kid a big lifelong hug and kiss. 

Why a College Education Matters

A recent study released by the Georgetown Center for Education and the Workforce starkly illustrates why getting at least some education after high school really, really matters.  Data from the study (https://cew.georgetown.edu/cew-reports/americas-divided-recovery/) shows that during the Great Recession, 7.4 million jobs for people with high school diplomas or less education were lost.  During the recovery from the Great Recession, some 11.6 million jobs were created but 11.5 million of these were for people who had at least some postgraduate education.  Only about 80,000 of the new jobs were for people with high school educations or less.

In other words, people with high school educations or less who lost their jobs during the Great Recession are probably still unemployed, unless they managed to get some postgraduate education after being laid off.  And they are likely to stay unemployed unless they advance their educational level or President-elect Trump creates a remarkable jobs program that somehow includes a very large number of low skills jobs with wages high enough to be acceptable to Americans. The latter would be a tough, tough challenge.

We are now in a time of policy flux, with the election of a President whose policy toward postgraduate education seems to be a work in progress at best.  If you're planning for the future, don't wait for the government to decide what it's going to do.  Find a way yourself to get some postgraduate education or training.  Sure, there are ways to make a good living without a college degree.  But electricians and plumbers need a fair amount of training after high school before they can get a license.  It's virtually impossible to attain a middle-class standard of living with just a high school diploma.  Investing in yourself is the most obvious way to step up above flipping hamburgers for a living.  The data shows this to be true.