When you are looking at an estate tax that comes in at a maximum rate of 35% it really gets your attention. Writing about it in this context it is just a couple of numbers with a symbol following them, but when this percentage is applied to your estate it can have a devastating impact. For example, if your estate was valued at $6 million, the first $5 million does pass to your heirs tax free. But the government will take $350,000 of the one million that exceeds the exclusion.
Once again, $350,000 can sound like just another number, but it can buy a couple of starter homes for your grandchildren or provide start-up capital for the business a loved one has always dreamed of. These assets are precious and allowing the IRS to eradicate them is simply not acceptable.
If you were in this exact situation one option that you could consider would be tax free educational gift giving. The idea of giving gifts while you are still alive to avoid the estate tax would be a logical first thought, but the government is well aware of this approach so there is a gift tax in place that is unified with the estate tax. But there are some gift tax exemptions that can be used to provide for your loved ones while reducing the taxable value of your estate in the process. One of these allows for educational giving.
Under the tax code each person is allowed to pay the tuition of an unlimited number of students, equaling any amount of money, completely free of taxation. The payments do have to go directly to the school, and they can only cover tuition, not books, fees, and other expenses.
So a person with a $6 million estate could use this exemption to pay tuition for family members tax free rather than giving that $1 million portion of their estate to the IRS, and this is something that is certainly worth keeping under consideration.