Family Spending Accounts – Taking Advantage of Gift Tax Exclusions


As we’ve been discussing, both the estate tax and the generation-skipping transfer tax were repealed at the end of 2009.  The twist being that, at any time, Congress may vote to retroactively re-instate the tax, or, if no action is taken this year, it may automatically renew in 2011.    That said, there is still a gift tax for people who give away more than $1 million during life – the only difference is that the top tax rate has been reduced from 45 percent to 35 percent.
 
One of the many provisions of estate tax law that is often overlooked is the gift tax exclusion for amounts paid directly for someone’s tuition or medical expenses.  Many people understand that they can give away 13K (or 26K for a married couple) each year without any gift or estate tax consequences.  What you might not know is that you can pay for things like medical expenses or tuition in any amount what-so-ever.  You could pay for a friend’s operation or college or business school tuition (or even someone’s private high school or other lower school education tuition) with no gift or estate tax consequence.  Similarly, a grandparent could help their children pay for current, day-to-day medical or tuition expenses – things like doctor co-pays, prescription drugs, and dental bills.  The only condition is that these “med-ed” payments, as they are called, must be made directly to the providers of those services.
 
To facilitate this in the simplest way possible, we have advised clients to open a “Family Savings Account”.   For example, a client opens a bank account in their own name starting at whatever amount they want (adding to it as needed).  They then give debit cards to their children or grandchildren and let them use the debit cards for payments made directly for tuition or medical expenses.  Alternatively, a client can give as many children as they want power of attorney over that account, so that they can write checks (again to medical providers or to educational institutions for tuition). 
 
Although you don’t technically need a lawyer to set up an account such as this, you obviously do need to trust the person who has check-writing authority or a debit card to not spend the money on other things.  And, in some cases, it might just be preferable to have a lawyer, accountant or financial adviser play this role and write checks on behalf your children, grandchildren’s or other desired persons’ medical and tuition expenses.

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