Financial Boot Camp Series: Maximizing Gifting and Charitable Impacts

By David Brinkman, CFA, CPA, CFP®, CPFA

When working with individuals and families that are on track with their overall financial plan and wanting to explore ways for their wealth to have a positive impact beyond their own personal happiness, our financial planning conversations typically transition toward other long-term financial goals, including to loved ones and charitable organizations. In this article, we explore gifting to family and other individuals, leveraging appreciated securities to fund charitable aspirations, and utilizing tax-deferred assets for gifting intentions.

When discussing gifting, it’s important to understand (2) key numbers, annually set by the Internal Revenue Service (IRS) $15,000 and $11.58 million.

$15,000 is the annual amount of money that any individual can gift to another individual, gift tax-free, referred to as annual exclusion gifts. 

$11.58 million is the 2020 lifetime gift tax exemption amount, meaning that an individual can make up to $11.58 million of gifts during the course of their lifetime before paying any gift tax. If married, you and your spouse could give away an aggregate of $23.16 million during your collective lifetimes before paying any gift tax or estate tax.

Let’s review a simple gifting example to illustrate the annual exclusion and lifetime exemption concepts. An individual gives $25,000 to their niece as a gift. The first $15,000 is an annual exclusion gift with the remaining $10,000 reducing their lifetime gift tax exemption and federal estate tax exemption amount to $11.57 million. While further explanation of financial planning strategies around the federal estate tax exemption is beyond the scope of this article, in our example upon that individual’s passing, their net worth (i.e. assets less liabilities) in excess of one’s remaining federal estate tax exemption ($11.57 million) would be subject to estate taxes.

Utilizing one’s annual exclusion gifts of $15,000 per year per individual can be a very powerful gifting strategy, particularly over several years, and especially with the additional benefit of both you and a spouse gifting to the same individual. Demonstrating the power of annual exclusion gifting to family members, an individual and a spouse each give $15,000 to their daughter, or $30,000 in total. This couple continues to give the maximum annual exclusion gift each year to their daughter for a five-year period. At the end of this year five-year period, they have gifted $150,000 to their daughter gift tax-free!

In addition to gifting to family, philanthropic individuals typically also look to benefit charitable organizations. Appreciated securities, investments that have materially appreciated since initial purchase, are great assets to consider using to accomplish charitable intentions while also lowering individual income taxes.

Let’s assume you own $25K of Big Tech Stock, with an initial investment of $5K in the stock. If you were to sell the $25K of Big Tech Stock and give the cash to a local charity, your stock sale would generate a $20K capital gain. Applying a 15% capital gains tax rate to this $20K capital gain, the resulting capital gains tax would be $3K, leaving a charitable gift of $22K, and therefore, a $22K itemized deduction.

Alternatively, you could gift the $25K of Big Tech Stock directly to your local 501(c)(3) charity, forego the $3K of capital gains tax altogether, and provide a $25K contribution to your charity with a $25K itemized deduction. The charity, given its not-for-profit status, is able to liquidate the Big Tech Stock without incurring any capital gains tax.

Another effective way of utilizing appreciated securities is by establishing a Donor Advised Fund (DAF). A DAF is like a charitable investment account established for the sole purposes of supporting charitable organizations. Typically, we recommend funding your DAF with appreciated securities to forego the capital gains tax as noted above. Gifting appreciated securities into a DAF is best utilized when you expect itemized tax deductions to be over $12,400 (single)/$24,800 (married filing jointly) in order to maximize one’s tax benefit. DAF accounts provide tremendous charity flexibility as DAF funds can be distributed in the form of a grants directly to any 501(c)(3) charity at any point in the future. This allows for one to pre-fund and deduct several years of future gifts in the current year.

Our final charitable gifting strategy applies to individual’s over age 70.51 with an individual retirement account (IRA). These individuals came make a Qualified Charitable Distribution (QCD) up to $100,000 from their IRA directly to a 501(c)(3) charity. The benefits of the money going directly from one’s IRA to charity is the exclusion of QCD from their taxable income, while counting toward fulfilling one’s Required Minimum Distribution. This can lower one’s taxable income and Adjusted Gross Income significantly in the year of the gift. In this case, the QCD cannot be treated as an itemized deduction.

The above planning strategies are very effective ways to gift assets to loved ones and charitable entities in a tax-efficient manner. Should you like to learn more about gifting strategies, one of our Schneider Downs Wealth Management Advisors would welcome a chance to have a conversation with you to discuss further.

Note, this age remains 70.5 although the required minimum distribution age is now age 72. There are no required minimum distributions in 2020, as a result of the CARES Act.

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.