We spend a lot of time focused on certain metrics or benchmarks because they are easily measured. Whether we are counting the number of steps we take in a day or our investment performance relative to an arbitrary benchmark, we use this data because it is readily available. In my experience, the things that matter most in our lives are often the most difficult to quantify. We suggest that clients focus on what is important, what they can control, and what they can influence.
For example, we cannot control our children and grandchildren, but we can influence them and we can invest in them, in other words, we can include an investment in human capital as part of our financial plans. While the costs to raise and educate our family may show up on a budget or cash flow projection, there is no line item in the plan that truly reflects the difference we have made by planning for future generations. The realized gains from these investments are absent from our financial plans and are not reported on a 1099. How many of us include human or intellectual capital on our balance sheets? I suspect the main reason for their absence is because these are difficult to quantify.
As the cost of college continues to rise, planning for these expenses increases in importance. Fortunately, there are a number of ways to save for college. One popular option is the 529 plan. Contributions to these plans are made with after-tax dollars, grow tax deferred and can be withdrawn tax-free for qualifying education expenses. Some states allow for contributions to be deducted on your state income tax return. Contributions to these plans are considered gifts to the beneficiary and are subject to gifting limits. However, as I pointed out last month, the 529 plan allows for one-time lump sum gifts up to five times the annual gift-tax exclusion, the amount one can gift yearly without reporting it. Currently, an individual can gift up to $75,000. This is both an investment in the future and an estate-planning tool
Another way to avoid making a taxable gift is for a grandparent to pay the tuition bill for a grandchild. Regulations under Section 170 of the tax code allow tuition payments made directly to a qualified institution to not be considered a gift. Qualified institutions can be primary, secondary, preparatory schools, high schools, colleges, and universities. This may impact the student’s ability to qualify for financial aid, so be sure to discuss that with us prior to making such payments.
Education is not the only way we can invest in human capital. Often we find that clients are making gifts to children and grandchildren who are suffering from costs associated with illness. These gifts may exceed the annual exclusion amount, yet still be exempt when made directly to the medical provider. These issues all require advanced planning and careful coordination with your tax advisor, attorney, and financial planner. If you are interested in discussing these strategies, that is what we are here for. Happy Thanksgiving to all of you.