You Can't Take It With You
In addition to family gifting, many individuals support giving to organizations that aim to help their communities. We highlight some strategies to make the most of your giving dollars.
By Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.
Giving to family members or charitable organizations is a highly personal decision, often tied with emotional strings. We make gifts aligned with our values, and our choice to give, or not to give, tells other people something about us. I have always felt a strong connection to Catholic Charities. In 1951, my father’s family emigrated to the United States from Germany with a few suitcases and a dream of a better life. His family received clothing from Catholic Charities to make their transition to America easier. Now I want to give that opportunity to someone else!
For some, gifting to family takes precedence over making donations to charity. Keep in mind that you may gift up to $17,000 per individual in 2023, without generating gift tax. Gifts can be made to individuals using cash or securities.[1] Various types of account structures, including 529 Plans, trusts, and Roth IRAs, may be used to help your loved ones accomplish their future goals, and your own.
In addition to family gifting, many individuals support giving to organizations that aim to help their communities. Below, we’ve highlighted some strategies to make the most of your giving dollars:
1. Consider making gifts using IRA dollars: for those age 70 ½ or older in 2023, you may request that your IRA custodian cut a check directly to a charity (called a qualified charitable distribution (QCD)). This strategy works well for individuals who cannot itemize deductions on their tax return. Each IRA dollar given to a qualified non-profit organization does not count as taxable income to the IRA owner. Additionally, for those taking required minimum distributions (RMDs), these donations can be used to satisfy your RMDs.[2]
2. Donate highly appreciated securities: if you are making a meaningful gift to a qualified charity, you may be able to donate a stock, mutual fund, or exchange traded fund (ETF) in kind. By doing so, you can avoid realizing the gain on the security at sale (and the resulting tax). The charity can sell the security and does not realize the gain if they are a qualified organization.[3] A win for both the giver and receiver! Consider this example of donating $50,000 of securities directly to charity:
3. Donor advised funds: these types of accounts can be held through a community foundation or custodian, including Schwab, Fidelity, and Vanguard. An individual can donate cash or securities to fund an account; using highly appreciated securities is most advantageous. At the time of funding, the donor receives a tax deduction up to the value of the securities / cash donated. The original securities are then sold and may be invested in other securities. Then, the donor may use the account to make donations all at once, or over time, to charitable organizations. There are some caveats - the receiving charity must be a legitimate qualified charity and the donor cannot use donor advised funds in a way that the donor receives some benefit (i.e. to pay for a gala dinner).[4] Unfortunately, a QCD from an IRA may not be directed to a donor advised fund.
4. Cash is always an option: for smaller gifts, one-time gifts, and gifts to smaller organizations that might not have a brokerage account to receive securities, cash might be the simplest and most effective option.
Finally, some states offer tax credits for charitable donations that might be used to help families paying private school tuition or to aid other charitable organizations. Tax credits reduce taxes due dollar-for-dollar. Ohio recently began a tax credit program to support scholarship granting organizations (such as some private schools), up to $750 per individual or $1,500 per married couple.[5] Arizona also offers tax credits for donations to selected charitable organizations and foster care organizations.[6]
We are available to help you, in coordination with your tax or estate professional, consider how to best accomplish your giving goals to family or to organizations aligned with your values. While gifts must be completed before December 31st to count for the current tax year, giving can be done throughout the year to support the people and causes that are near and dear to you.
Important Disclosure Information & Sources:
[1] “Frequently Asked Questions on Gift Taxes”. Internal Revenue Service, 2023, irs.gov.
[2] “IRA FAQs - Distributions (Withdrawals)”. Internal Revenue Service, 2023, irs.gov.
[3] “About Publication 526, Charitable Contributions”. Internal Revenue Service, 2023, irs.gov.
[4] “Donor-advised Funds”. Internal Revenue Service, 2023, irs.gov.
[5] “Scholarship Donation Credit”. Ohio Department of Taxation, 2023, tax.ohio.gov.
[6] “Credits for Contributions to QCOs and QFCOs”. Arizona Department of Revenue, 2023, azdor.gov.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience.
Financial Gifting Strategies For Your Family
Many people want to explore how they can make gifts to family members without affecting their own financial security. We offer these possible gifting options.
By SJS Senior Advisor & Managing Director Jennifer Smiljanich, CFP®.
You'd like to experience the joy of gifting to your children and grandchildren during your lifetime. You'd like to be able to put a smile on the face of your child who is struggling to make ends meet. You are concerned about potential changes to estate tax laws and whether that may impact how much of your estate goes to Uncle Sam. Do any of these situations strike a chord with you?
In the last year, we have heard from many clients who would like to explore how they can make gifts to family members without affecting their own financial security. Some worry about potential tax changes, and how those may affect what legacy they can leave to future generations.
We have helped families create and implement gifting strategies for the past 25+ years. We are glad to help offer guidance to you and explain possible gifting options. Please note that all of the below gifting options apply to both children and grandchildren.
Gifting Money Directly
Each year, an individual may give up to $15,000 (for 2021) per child - or up to $30,000 for a child and their spouse - without using up any of the individual’s lifetime gifting limits.[1] A couple may gift a combined $30,000 per year per child, or a combined $60,000 to a child and their spouse.[2]
If an individual were to die in 2021, they could leave up to $11.7 million ($23.4 million for couples) to beneficiaries without paying federal estate and gift taxes.[1] There is discussion that these high estate and gift tax exemptions might be on the chopping block; President Biden has proposed decreasing estate and gift taxes levels to those last seen in 2009: $3.5 million per person for the estate tax, $1 million for the gift tax, and a top tax rate of 45%.[3]
Gifting For Specific Purposes
Tuition And Medical Expenses
Many parents want to gift money for specific purposes, instead of gifting cash with no limitations on potential uses. For example, there are some exceptions to the annual $15,000 gifting limits, including:[1]
Tuition for someone else
Medical expenses for someone else
Education Account: 529 Plan
To help pay for your child’s future education costs, you can create a 529 plan with your child (or grandchild!) as the beneficiary, and then donate to the 529 plan subject to gift tax rules. 529 plans can be invested in broad-market mutual funds, and can grow tax-free and penalty-free as long as withdrawals are used for the beneficiary’s qualifying education expenses.[4] A donor to a 529 plan has the ability to "frontload" gifts of up to five times the annual gift tax exclusion. However, if the donor were to pass away before the full five years, a portion of their gift could be added back into their estate and may result in gift taxes.[5]
Retirement Account: Roth IRA
You can also help your child save for retirement: as long as your child earns enough taxable income (but below the Roth IRA income limit) and has not contributed to a Traditional IRA or Roth IRA for the year, you can contribute $6,000 (2021 limit) directly to your child’s Roth IRA each year.[6]
Gifting Appreciated Securities
Generally, gifts can be made in cash or using appreciated securities (stocks, bonds, mutual funds, ETFs). Gifting highly appreciated securities to someone in a lower tax bracket may result in lower taxes for your family as a whole.[7]
Family Loan
If you want to help your child but don’t want to gift money, you can instead loan money. This may help your child get a loan for a specific purpose at a lower interest rate than third-party loan vendors may charge. To ensure the loan’s legitimacy, the IRS mandates that any family loan must have a signed written agreement, a fixed repayment schedule, and a minimum interest rate (you can use Applicable Federal Rates as the minimum).[8] If the loan exceeds $10,000 or the loan recipient uses the money to produce income (such as investing in stocks or bonds), you will need to report the interest income on your taxes.[8] We recommend that you consult with your tax advisor.
Summary
Parents often tell us: “We want to give our children enough so that they feel they could do anything, but not so much that they could do nothing.“ The better you manage your finances, educate your children on financial topics, and plan your specific gifting strategies, you may not have to gift as much as you think to help give your children all sorts of opportunities.
As always, we are here to help you go over gifting strategies, and help you choose and implement the best strategies for your family situation. If you have any questions or just want to talk with us about gifting strategies, please feel free to reach out to us.
Important Disclosure Information And Sources
[1] “Frequently Asked Questions on Gift Taxes“. IRS, irs.gov.
[2] “Will You Owe a Gift Tax This Year?“ ElderLawNet, 06-Mar-2021, elderlawanswers.com.
[3] “IRS Announces Higher Estate And Gift Tax Limits For 2021“. Ashlea Ebeling, 26-Oct-2020, forbes.com.
[4] “Topic No. 313 Qualified Tuition Programs (QTPs)“. IRS, irs.gov.
[5] “Do You Have to Pay Gift Taxes on 529 Plan Contributions?“ Mark Kantrowitz, 28-Jan-2020, savingforcollege.com.
[6] “Roth IRAs“. IRS, irs.gov.
[7]“How to Give Stock as a Gift (And Why Tax Pros Like The Idea)“. Chris Davis, 15-Dec-2020, nerdwallet.com.
[8] “Family Loans: Should You Lend It or Give It Away?“ Schwab, 24-May-2019, schwab.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Statements contained in this post that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.