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1) Gift Appreciated Assets: Tried and true good friend to all planners, this strategy involves gifting an asset that has appreciated, thus avoiding selling and paying tax on the gain and instead benefiting from a deduction for the fair market value, subject to some limitations. There are many types of property that you can use for this, from publically traded assets such as stocks to less liquid assets such as real estate holdings. Work with your team of advisors to discuss which asset will work best in this scenario.
2) Donor Advised Funds: Want to gift but not sure to whom? Would you like your children to participate in your largess and decision making? These are two reasons that Donor Advised Funds (DAF) are becoming a more popular planning technique. A DAF is established at a public charity and your deduction occurs in the year that you donate to the fund. However, you can have the DAF keep the cash from the sale of the asset on hand for multiple years and advise them annually how much and to whom you'd like to gift. This is an excellent tool for raising socially aware and financially literate children and an excellent idea for those who want to give over time but need the deduction this year.
3) Gift up to $100,000 of your annual Required Minimum Distribution (RMD): If you have already turned 70-and-a-half you know the joys of paying taxes on required minimum distributions from retirement accounts. The good news is that you can satisfy your RMD and donate to your favorite qualified charity by transferring up to $100,000 directly to that organization from your retirement account in lieu of a required distribution. You won't qualify for a further tax deduction, but you won't need to include the RMD in taxable income, either, thus lowering your AGI (adjusted gross income). Don't forget that the funds must go directly from your qualified retirement account to the charity and not paid to you first for transfer.
4) Charitable Remainder Trusts (CRT): I mention this simply to pique your interest as setting up a CRT is a sophisticated technique that involves advanced planning. In its simplest format you make an irrevocable gift to a qualified charity and receive an income stream and a present value income tax deduction. At your death or the end of the period set up for the income stream, the asset goes to the charity. This is an important tool for those with charitable intent and highly appreciated, often highly valued assets, who are additionally interested in reducing their taxable estate while still retaining some benefit from the asset. That said, there are many nuanced forms of charitable trusts that can be utilized to fit your needs. You definitely want a sharp and experienced advisory team guiding you during design and implementation.
5) Gifting to family: They do say charity begins at home, and while there's no likely income tax deduction here, there is the joy of removing the asset from your estate, avoiding tax on the appreciation if it's sold for an amount higher than its basis, and the joy of benefiting a loved one. Maybe your gift will be outright cash, or maybe you'll fund their Roth IRA for the year (check the limitations!). No matter your approach and motivation that's a powerful combination of benefits and a wonderful gift. For many there's no greater joy than helping those you love while you are alive and can see the impact your gift makes in their lives.
Hopefully these ideas are helpful and resonate at this time of year when we reflect on what matters most and find ways to share our bounty and improve the lives of others. Wishing you all a wonderful holiday season!
"The review, assessment, and/or opinion expressed in this column are limited to and in association with general financial planning subjects. They are intended to introduce the reader to a general financial planning topics. This column should serve as a tool that should assist readers in the development of subsequent discussions with a financial planning professional. Always consult an accountant and/or attorney to assess your individual situation prior to implementing any financial planning strategy, including any strategy directly or indirectly referenced in this column."
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Lamorinda Weekly, Moraga CA