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Legacy Planning: Gifting to Loved Ones and Charitable Organizations

by Scott Dolson

May 20, 2024





The term legacy simply means “a gift by will, especially of money or other personal property”, which most often constitutes giving to family, friends, charity, or some combination of the three.  In practice, legacy means different things to different people with an infinite number of desired outcomes.

 

Grant Street Asset Management (GSAM) has decades of experience in helping our clients to grow their legacy by developing a plan that supports loved ones or a specific mission during their lifetime and beyond. In addition to making an impact, an important benefit of developing a gifting strategy is to reduce one’s overall estate, in turn lowering any potential estate tax liability.

 

Developing a gifting strategy is especially important today, as the 2017 increase of the lifetime federal gift and estate tax exemption expires at the end of 2025.  This will result in an exemption amount for individuals of around $7 million (current limit is $13.61 million).

 

There’s no right or wrong way to plan your legacy, but here are a few things to consider as you look to develop or refine your gifting strategy:

 

Gifting to Loved Ones

1) The simplest way to make a gift without an administrative burden is to maximize the annual gift tax exclusion amount ($18,000 for 2024). This allows one to give up to $18,000 to an unlimited number of individuals with no federal gift or estate tax consequence. Clients who expect to make recurring gifts each year typically develop an annual gifting schedule with GSAM to manage and process. It is important to note, however, that although this strategy is straightforward, it is typically just one component of a larger gifting strategy for those with a sizable projected estate. 


2) Another basic but effective way to gift without much administrative work is to pay for someone else’s tuition or direct medical expenses. These payments should be made directly to the institution or provider and not given to the beneficiary.  This allows one to avoid gift tax and will not count against one’s lifetime exemption amount.


3) A more sophisticated and custom solution is to establish a trust. This provides the grantor a host of possibilities in developing a structure that is specifically tailored to his or her wishes. When considering trusts, there are two different types that provide different levels of ownership and control: revocable and irrevocable. A revocable trust is referred to as a living trust because the grantor still owns the assets in trust and he or she may change or revoke the trust during his or her lifetime. A revocable trust allows maximum control and flexibility of the assets in trust. Conversely, an irrevocable trust may not be changed or terminated by the grantor once created (except in rare circumstances). Irrevocable trusts are a popular estate planning tool as all assets held in trust are outside of one’s taxable estate. Both types of trusts afford the grantor the ability to customize a particular solution for their desired legacy.

 

Charitable Contributions

At the most basic level, clients typically donate out-of-pocket throughout the year to one or more charities that align most with their values. While directly donating may be the simplest way to give, there is only a tax benefit when the deductions are itemized on a tax return. Cash gifts to charities throughout the year may be tax deductible, but only up to 60% of your adjusted gross income (AGI).  Legislation from 2017 doubled the standard deduction for taxpayers.  As a result, most tax filers no longer itemize deductions and do not receive tax benefits for their charitable gifts unless they exceed that minimum deduction.  Although every strategy will be different when it comes to charitable donations, here are a few different tactics to consider when developing yours:


Donate Appreciated Assets with High Unrealized Gains:  If you hold highly appreciated assets in a taxable account (joint/personal brokerage or trust), you can donate shares/assets to charity and avoid realizing a capital gain that would create a tax liability. (Essentially, you are donating assets that have grown substantially over time but have not yet been sold.) When you gift appreciated assets directly to your favorite charity, your donation amounts to the fair market value of the donated assets at the time the gift is made. Since you are not selling the position, there is no taxable gain to be realized. When donating appreciated assets, you are eligible for a charitable income tax deduction (if itemizing) equal to the fair market value, up to 30% of your AGI.

 

Utilize Qualified Charitable Distributions (QCD):  If you have an IRA (individual retirement account) and are at least 70½ years of age or older, utilizing qualified charitable distributions may help to reduce taxable income while also enriching your charity of choice. A QCD is a donation made directly to charity from your retirement account (i.e., a direct transfer that never passes through the IRA owner) and the distribution helps to satisfy your required distribution (if applicable) without being considered taxable income. Certain requirements apply when making QCDs, including: 

  • For a QCD to count toward your annual required minimum distribution, it must be made by the same deadline as a normal distribution, which is 12/31 of the tax year in question.

  • Donors cannot receive any benefit for making a qualified distribution to a charity (i.e. corporate sponsorships or auction wins do not qualify).

  • Individual donors can contribute up to $105,000 per year in QCDs. The $105,000 per person limit applies to the sum of all QCDs taken from all IRAs (if more than one) in a year. A donor can make one large contribution or several smaller contributions over the course of the calendar year.

  • A donor can make a qualified charitable distribution that exceeds the individual’s RMD for a given year; however, that extra distribution cannot be carried over. This is different than other giving strategies such as cash donations and appreciated assets, or contributions to a donor-advised fund where large donations may be made in one year and the tax benefits may be pushed forward into future years.

 

Consider a Donor-Advised Fund (DAF):  A donor-advised fund is its own charitable entity that provides maximum giving flexibility to certain qualified charitable organizations. A donor may use cash or appreciated securities to fund a DAF. The donor benefits from an immediate tax deduction for the amount funded in a given tax year and also benefits from flexibility to donate those same funds to charity over time, if desired.  Assets within a DAF may be invested to grow tax-free, allowing you the potential to give even more to your desired charitable initiatives. These often require less administrative cost and overhead than a private family foundation and can also serve as a family legacy planning tool for the next generation, as ownership can be passed on. Although setting up and funding a donor-advised fund requires a bit of organization and planning, the tax and philanthropy benefits offered are well worth it.

 

This brief summary explores a few different methods of giving that may help to maximize one’s gifting and charitable endeavors, while reducing assets in one’s estate to minimize taxes. As clients reach this level of wealth and complexity, it’s imperative to engage with a trusted advisor to develop a tailored, long-term solution that focuses on the decades ahead.  As an established fiduciary with over three decades of proven experience, GSAM welcomes this conversation with you.  Please contact us at advisors@gsaminc.com to learn more. 



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