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CFP® Practice Question of the Week: Taxable Gifts

Kevin, a 55-year-old corporate executive, wants advice as to when he can retire. His current salary is $240,000 and he receives an annual bonus of $300,000; he also has annual stock options and restricted stock awards valued at $100,000. His employer contributes to a cash balance pension plan as and matches his contributions to a 401(k). Kevin owns a whole life insurance policy with a $500,000 death benefit and is considering the purchase of a term policy with a $2,000,000 death benefit. He and his wife, Anne, also age 55, believe they can live on an after-tax income of $180,000. Assume a federal income tax rate of 35%.

Kevin is in the 42% marginal tax bracket (combined federal and state). Kevin wants to contribute $100,000 towards his child’s education in the next 3 years. Which of the following approaches minimizes his taxable gift?

  1.   Paying the college directly
  2.   Contributing the funds to a Section 529 Qualified Tuition plan
  3.   Contributing to a Uniform Transfers to Minors Act (UTMA) account for the child
  4.   Contributing to a Coverdell Education Savings Account plan