It’s hard to believe that tax season is here already. In an effort to help our clients be...
Paying it Forward in any form can be very rewarding. There are emotional benefits, financial benefits, generational benefits, and spiritual benefits. Helping others can even be a calling. At Virtus Wealth Management, we help our clients understand various gifting strategies so they are better equipped and prepared to reach their gifting goals.
Charitable donations are oftentimes the first type of giving that comes to mind. Individuals get a tax break for charitable giving if they itemize their deductions. Recent tax law changes, however, increased the standard deduction making itemizing deductions more difficult for most. That said, there are still ways to get a tax break for charitable donations.
The main strategy for the general population is to “bunch” the donations together so itemizing is possible every other year. By “bunching” property tax payments and charitable donations together, it makes itemizing in those years easier and facilitates the tax deduction. Nice!
Another strategy is to use Donor-Advised Funds (DAF). A DAF is like a charitable investment account for the sole purpose of supporting charitable organizations. The contributions are generally eligible for an immediate tax deduction; then those funds can be invested for tax-free growth until the client recommends grants to virtually any IRS-qualified public charity. This takes charitable giving a step further by allowing our clients to set aside money to give to charities and take the immediate tax deduction before they even know which charity they want to support. This especially comes into play when our clients want to deduct a substantial gift in one year due to exercising stock options, receiving a large bonus, selling a business, or receiving sudden wealth in some form. Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.
Qualified Charitable Distributions
Under current law, when our clients are old enough (70 1/2 years old or older), they can donate up to $100,000 directly from their IRA to a qualified charity, tax free, using the Qualified Charitable Distribution (QCD) approach. This technique is effective because it essentially allows this age bracket to get the tax deduction for their charitable donation without itemizing their deductions.
Charitable Remainder Trusts
A Charitable Remainder Trust (CRT) is a gifting strategy that generates a potential income stream for the client, as the donor to the CRT, or other beneficiaries, with the remainder of the donated assets going to their favorite charity or charities. This charitable giving strategy can enable the client to pursue their philanthropic goals while also helping cover their living expenses. Charitable trusts are irrevocable, but they can offer flexibility and some control over their intended charitable beneficiaries as well as lifetime income, thereby helping with retirement, estate planning and tax management.
Gifting To Individuals
Another type of gifting is the giving of assets that is not necessarily charitable or tax deductible. It’s just regular, old gifting … like a present! Sadly, the federal government has rules: the federal gift tax regulates assets received in the form of a present. On the plus side, we know the rules and can use several techniques to help our clients understand and avoid the gift tax dilemma including:
- Using the annual gift tax exclusion
- Using the lifetime gift and estate tax exemption
- Making direct payments to medical and educational providers on behalf of a loved one
Annual Gift Tax Exclusion
Currently, a client can give any number of people up to the “annual gift tax exclusion” in a single year without incurring a taxable gift. This amount increases for inflation periodically, so your financial advisor can help you keep up-to-date on the current amount. Spouses also have the option to ‘gift split’ allowing married couples to gift twice as much to an individual without being subject to the gift tax. The recipient typically owes no taxes and doesn’t have to report the gift unless it comes from a foreign source. However, if the gift exceeds the “exclusion” to any person during the year, it has to be reported on a gift tax return, and it begins to eat into the lifetime gift and estate tax exemption (see below).
Lifetime Gift and Estate Tax Exemption
In addition to the annual gift tax exclusion, there is the “lifetime gift and estate tax exemption”, which also varies in amount. The lifetime exemption applies to gifts and estate taxes combined—any portion of the exemption you use for gifting annually throughout your lifetime will reduce the amount you can use for the estate tax. The IRS refers to this as a “unified credit.” Each donor (the person making the gift) has a separate lifetime exemption that can be used before any out-of-pocket gift or estate tax is due. In addition, a couple can combine their exemptions to gift twice as much as a single filer before reaching the exemption amount.
There’s one big caveat to be aware of—the lifetime exclusion limit has varied significantly, ranging between $1 million and $12 million just since the turn of the century. It is important to know what the exclusion limit is when planning. At Virtus Wealth Management, our financial advisors can keep you informed on the changing limits and how it will impact your specific situation and financial plan.
For the majority of people, the lifetime gift and estate tax exemption will allow for the tax-free transfer of wealth from one generation to the next. For those who have acquired enough wealth to surpass the gift and estate tax exemption, there are several strategies we can implement to minimize your gift and estate tax in order to maximize your legacy.
The simplest way is to gift your assets to your loved ones now, rather than waiting until you pass away. If you have the means, giving the assets now has two advantages. First, you get to see your loved ones benefit from your gifts. Second, the gifted assets could increase in value for your loved ones—and could decrease your taxable estate.
Establishing A Trust
One concern many people have when it comes to giving assets away early is that sometimes the person receiving the gift may not be ready to handle the responsibility of managing such a large amount of money. A good example of this is a large amount of money gifted to a young child or teenager. One way to give those assets, but ensure they are protected from misuse, would be to give them to an irrevocable trust and make the child or teenager the beneficiary.
This method allows you to set the rules of the trust and determine how the assets will be invested and distributed. For instance, you could create a trust that stipulates the beneficiary can only have access to the income generated by the assets—or you could set specific rules, such as requiring the beneficiary to graduate from college before having access to the funds in the trust.
There are numerous options when it comes to structuring a trust, and each state has its own rules. If you’re interested in learning more about the various options available, it’s important to take the time to meet with an attorney or tax professional.
You can also make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without adding to your annual or lifetime gift exclusion. This method is a great way to help out a loved one with large medical bills from an illness or to help pay for a family member’s education.
How Virtus Wealth Management Can Help
Gifting has many benefits and complexities at the same time. Charitable giving combined with lifetime gifting can be a great strategy as long as you leave yourself enough to live on. For the gift to count, it must be a complete and irrevocable transfer. We recommend taking the time to meet with your team of professionals to ensure your gift and estate plans are well thought out and properly implemented.
At Virtus Wealth Management, we help our clients maximize their wealth by minimizing their tax liabilities in all facets of their finances. With our holistic wealth management approach and through our Connect Wealth Process™, we can create a unique financial plan that strives to reach all of your financial goals, including gifting and retirement goals.
Get started today by scheduling a complimentary consultation with our team of advisors.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.