Most taxpayers know that they can give gifts of up to $14,000/year to any individual without reporting the gift on a gift tax return. If married couples elect to split gifts, then the couple can give up to twice that amount ($28,000) to an individual without reporting. But, there is a little known loophole for making larger gifts without affecting the lifetime gift exclusion.
As a part of the Internal Revenue Code section 529(c)(2)(B), taxpayers can elect to treat a gift to an individual as given over a 5 year period as long as it goes into a qualified Section 529 plan. Here's an example:
Granddaughter is nearing college age, and Grandma has some excess funds she would like to use to help pay for college. Grandma can deposit up to $70,000 ($14,000 x 5) into a qualified 529 plan with Granddaughter as the beneficiary, or Grandma and Grandpa can deposit up to $140,000 ($28,000 x 5) into a 529 plan if they elect to split gifts. In that year, Grandma (and Grampa if splitting gifts) will file a Form 709 gift tax return and check the box on page 2, Schedule A section B to elect to recognize the gift over 5 years. Grandma (and Grandpa if splitting gifts) will pay no gift tax in the year of the transfer, and they are not required to file a gift tax return in subsequent years unless they make other gifts over the annual limit.
The only catch is that if Grandma or Grandpa make an additional gift to Granddaughter during the 5 year period, that gift must be reported and will be a taxable gift subject to the lifetime exclusion. Also, if Grandma and Grandpa live in a state where they can receive a tax credit for a contribution to a 529 plan, the credit is typically only good in the first year, since that is when the contribution was made.
As I mentioned, this is not a well known tax benefit for gifting, and can be very beneficial for parents or grandparents with sizable estates looking for ways to transfer assets without incurring gift taxes.
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