You may have heard that it is “more blessed to give than to receive”. This concept applies to your personal finances as well as to your social conscience.
There are a variety of ways that go beyond cash gifts to your family or favorite charity which can create useful strategies for your future financial life.
Important: most giving strategies involve some interaction with the tax code. You should consult your tax advisor before beginning any giving strategy. Trust planning should be done with your legal counsel.
Here are some ideas that may encourage you to expand your giving.
Create a family legacy of education or responsible spending. Parents or grandparents can gift funds for the benefit of future generations, through a variety of vehicles, either as lifetime or memorial gifts.
- Roth and regular IRAs can generate lifetime income for kids and grandkids.
- Use a Transfer On Death (TOD) account to leave specific financial assets to heirs.
- 529 college funding plans can receive gifts from multiple family members.
- Insurance and annuities generally multiply the value of gifts to beneficiaries.
Give assets in trust
If you desire more control over future use of your gift, consider a formal trust, funded with assets or life insurance. This could permit heirs to draw funds for education, home purchase, or other good purposes, with oversight by a trustee. Benefits include:
- Allows uneven distributions
- Accommodates families with special needs
- Can last for generations if structured properly
If two very generous grandparents contribute the maximum annual gift of $28,000 ($14,000 each) to a 529 plan for 10 years, that would create a fund of $352,000 at 5%. That could fund college for several family members!
If a child or grandchild beneficiary receives a $20,000 inherited Roth IRA at age 25, an annual distribution is required. This could create an increasing “birthday” gift for the beneficiary every year starting at $340.
Charitable Giving and Tax Strategies
Gifts to qualified charities create income tax savings if given within the limits allowed by the Internal Revenue Service.
- Current cash or property gifts provide immediate income tax deductions, subject to certain limits, and the charity receives an immediate benefit.
- If you are over 70 ½, and give part of your IRA Required Minimum Distribution to charity, there is no recognition of income to the donor.
- Gifts of appreciated property will provide a charitable tax benefit, and gains will be realized by the charity instead of you.
- If you make a charitable gift now but retain income or a partial return of the gift, you may be able to take a partial deduction.
In our current tax law, estate and gift taxes are due only on transfers larger than $5.49 million (single) or $10.98 million (filing jointly); however, many assets we hold can generate income taxes to beneficiaries.
If you transfer assets to a charity in your will or trust, or the charity is a beneficiary of assets (instead of a person), many taxes can be eliminated.
No taxes apply to the following:
- Distributions from inherited IRAs, 401ks and other taxable retirement plans
- Gains on annuities
If you have annuities or retirement plans with funds left after your and/or your spouse’s lifetimes, a charitable beneficiary could save income taxes of 28% to 33% plus state and local taxes.
Let’s say you want to give $50,000 to your beloved Alma Mater. Do you want tax benefits now or later?
What asset do you give?
- If you sell appreciated assets and give cash, you would pay taxes on any gain, offset by tax benefits from the gift.
- You can give the asset directly to the charity now or at your death and avoid the taxes.
- If you take a distribution from a retirement plan to make a gift, you will incur income tax on the distribution, offset by a tax reduction for the gift.
- You can make your Alma Mater one of your retirement plan beneficiaries, and no tax is due on that distribution at your death.
- Large gifts may not be fully deductible in one year, so giving cash over time may ensure that each gift is deductible.
Plan for Maximum Flexibility and Minimum Taxes
In a perfect planning and giving world, we might all like to take care of our families, and through charities, care for others less fortunate than ourselves.
Consider this plan:
- Save aggressively.
- Give generously.
- Live modestly.
- Leave tax-favored assets to heirs (life insurance, Roth IRAs, tax-free bonds).
- Leave unused tax-heavy assets to charities (401k, IRA, annuities).
- Review beneficiaries often.
- And be content that you have done your best.
The Unleashed Advisor has been providing financial advice to individuals and small business owners for over 35 years. He has been a Certified Financial Planner since 1992. Formal financial planning has been provided to clients since 1989. This experience has produced a wealth of interesting events that allows the Unleashed Advisor to understand and navigate the complex and confusing world of finance.
The Unleashed Advisor is motivated by the opportunity to help people reduce the anxiety surrounding financial decisions, subscribes to the principles of servant leadership with clients and readers, and is untethered from traditional concepts of finance or any one strategy to solve problems.
*Unleashed-to let go, to release. To bring about, to precipitate.
Photo by Evan Kirby