As we speed through tax season, I have been a part of several discussions centering on gifts. Many of the families we work with routinely give and I think there is a special part of human nature that wants to have a positive impact on people and causes. This two-part article is going to look at the actual technique of giving. You will have your motivations be that they are charitable, obligatory, or possibly even purely to mitigate tax. In Part I, we will look specifically at giving cash and securities to philanthropy; we will also look at strategies on how to gift what are called “taxable gifts” and how to think about IRS Form 709. In Part II, we will look at two more complex choices that involve irrevocable gifts over time. We tell our investors regularly that a great deal of what we do at Capital Wealth Advisors is not just about what stocks and which bonds to buy or sell. We try to consider all aspects of the wealth spectrum by being able to give with skill and avoid or mitigate tax is critical to proper holistic planning.
What is a Gift?
Let us begin with defining a gift. From a tax perspective, this is more persnickety than you might think. The IRS defines a complete gift as one where you surrender your dominion completely to another person or entity. In other words, there cannot normally be conditions where the gift gets revoked or has a string attached. These rules have exceptions, but they are fairly rare. Let’s give an example or two. The most basic of all gifts is what we call an “annual exclusion gift.” This is a gift that can be given by anyone to anyone in dollars or dollars’ worth of property. In 2023, the annual exclusion limit is $17,000 or $17,000 worth of property¹. For a gift to be complete for IRS purposes you must give it and then not take it back in part or whole. If you write a check for $17,000 and walk away, you have severed all rights to the gift; thus, it is a completed gift. If you gift a rental property but retain the rights to the rents, you have not relinquished your dominion, or enjoyment of that property completely. So, you would not remove the rental property from your estate nor get any deductions. The IRS wants to ensure the gift is fully given before any tax benefits are offered. Additionally, in the current tax code small to medium-sized gifts do not count as they once did because of the high standard deduction and suspension of many things that were once commonly itemized, like professional dues, business entertainment, and so on.
Charitable Gifting
Let us take a look at giving regularly to a charity. IRS Publication 78 ( IRS pub.78) names many approved 501(c)3 charities. 501(c)3 is the code that enables the institution to operate in a tax-exempt status. Let’s say that you give weekly or quarterly; you have cash, IRA assets, and a brokerage account with appreciated securities, which account would you gift from? and why would you choose that method versus the others?
If you are not trying to mitigate a large taxable event, I would normally recommend the gift of appreciated stock. I would recommend appreciated stock because this stock may usually be given in kind and sold by the charity with no tax to you or them. So, in effect, you utilized the capital gain in a very clever way to gift rather than pay taxes. Let’s see how these different gifts might work in practice by comparison.
Giving Cash:
- Check IRS pub.78 to ensure you can give charitably.
- Write a check for less than or equal to $17,000 - No deductions available; no taxes owed.
- Write a check for over $17,000 - File IRS 709 gift return- up to 60% of your adjusted gross income may be available as a deduction.
- The donee receives the funds and completes the gift.
Giving the Proceeds of a Stock Sale:
- Check IRS pub.78 to ensure you can give charitably.
- Sell the value of appreciated stock into cash - The sale generates a capital gain tax that can range from 0-20% tax to you.
- Write a check for the proceeds to the charity. If that sale is above $17,000, use IRS 709 gift return with your 1040.
Giving Appreciated Stock:
- Check IRS pub.78 to ensure you can give charitably.
- Call the intended recipient to ensure they have the capacity to receive securities and how to liquidate them.
- Work with your advisors to complete an appropriate transfer - Because no sale occurred, no tax is imposed on you or the charitable recipient.
- Use the cash that you would have given to replace the stock you gave away or diversify your holdings.
Giving from an IRA:
- Check IRS pub.78 to ensure you can give charitably.
- Remove assets from the IRA. Pay earned income taxes on every dollar that comes out. If you are Required Minimum Distribution (RMD) eligible some rules may exempt this gift from tax. See IRS publication 590b for those rules.
The origins of the gift matter because we all wish to see the good utility of money and the mitigation of taxable gains. How many of your stock positions do you feel are a risk? If tax were not a consequence, would you sell the risky or oversized position to eliminate that risk? Many investors we have worked with said they would do just that. Giving can be a way of using the gains you have for a good purpose while possibly avoiding tax.
LARGE GIFTS
Now that we have looked at what to give let us talk about two common ways to accomplish a large gift and their consequences.
- Federal Gift Exemption - Using IRS Form 709 - Every one of us is granted a Federal Gift exemption. We may gift large gifts while living or give them at death. Among other things, IRS Form 709 allows you to tell the government that you intend to use some or all of your gift credit before death. By filing this form, you could be preventing taxes for yourself, or the recipient. In 2023, we all have $12,920,000 worth of gift exclusion.² We recommend that any time you exceed the normal annual exclusion gift ($17,000 in 2023) that you discuss filing this form along with your normal tax return. Even if you are gifting to charity, there is a limit to the time that the IRS can scrutinize these returns. Some of the founding principles of dynasty trusts, or gifts to grandchildren require the use of the IRS Form 709. At death, your tax professional will examine any gifts given during life and at death to determine elements of your final tax return. It bears mention that we are living in the single highest gift tax exclusion environment of all time. Many owners of wealth are using this tool in their estate planning and giving away what might become taxable if they should pass after the tax year 2025. Not all these gifts are charitable, but the theme of estate size management is ever-present. As many of you know, with no changes to the law, there is a large list of tax code reversions coming. There is much speculation about what may happen after the tax year 2025. What is currently known is that the federal gift credit will be reduced significantly with no Federal intervention.
- Donor-Advised Fund - Let’s examine a second way to give a large gift in a single year. A donor-advised fund is typically utilized when the tax deduction is needed now, and the gift needs to be given later or over a time period of more than this tax year. How might such a misalignment occur? Let us say that you pledged a gift of X dollars to your university over an extended period or that you regularly gift at a place of worship. Let’s also say that you had a radical shift upwards in salary, won a big prize, or got bought out of a business that resulted in large income payments over a few years. These events are wonderful but may come with a tax cost you want to mitigate. Let us assume that the pace of giving will not change because of the windfall. Donor-advised funds are 501(c)3 charitable vehicles; so, your large gift deposit now into the vehicle creates a deduction you may need to offset the windfall mentioned earlier. Once the dollars have been placed into the fund, you may then grant dollars out to your intended recipient over whatever time period suits you. In so doing, you have honored your pledged giving in the time you have agreed on and accelerated the deduction to the year when it was needed most. There are many other methods besides donor-advised funds, however, they are popular because they are usually quite inexpensive, and the plan sponsor handles the tax reporting. One other big deal with the donor-advised fund as opposed to private foundations is that they are not required to disclose donor or donee information. If avoiding attention is important to you this may be a fantastic choice. Thankfully most large brokerage houses offer fantastic products if you are willing to allow them to manage the donated funds. There are private firms that can allow professional management as well.
CONCLUSION
I hope that you have come to see that there is indeed more to giving than simply stroking a check. As with most things, there are those of us who have studied the laws and are prepared to listen to your story and warmest wishes. At CWA we would be happy to coordinate with your CPA, Legal counsel, donee institutions, or people you wish to impact to examine the causes. We can help determine the best gifting strategy for your situation. One closing thought to bear in mind is that our industry does a wonderful job of preparing money for people, but a poor job of preparing people for money. Giving gifts should always start with the intentions of the givers, and the needs of those they would propose to serve. It should never be a discussion that starts with a flashy trust, foundation, or framework. Often the simplest ways are the best. There is surely room for complicated gifts, but I have found those to be very rare. Please let us know what you have in mind so that we can listen and partner with your family. In part II, we will look at two complex gifting strategies, how those might be used and by whom.