Giving Money Away, Successfully

As we approach the end of another year, many people are considering gifting some money or assets to the people and causes they care about. Depending on the situation and your goals, there are a few nuances worth considering which can make your gifts a lot more effective. 

If you are giving money to a qualified, tax-exempt charitable organization, here are a couple strategies to maximize the impact of your gift. 

First, if you are over 70 ½, and do not itemize on your taxes, you should consider making your gifts via QCDs, Qualified Charitable Distributions. These let you send the money straight from your pre-tax retirement accounts to the charity of your choice. This effectively excludes the money from your taxable income. Otherwise, you risk taking the money out, owing taxes on it, and not being able to claim the deduction for giving on your taxes. Though technically you could claim the deduction by itemizing your taxes, in many cases the marginal benefit of doing so is less than the standard deduction, or is reduced significantly because of the standard deduction. 

As an example, suppose you are part of a married couple, and your combined standard deduction is $37,500 ($31,500, plus $6000 per person senior deduction). Maybe your deductions for state income taxes, property taxes, etc total just $18,000. That means you could give up to $19,500 to charities and not receive a tax benefit for doing so because the standard deduction would still be greater than all your itemized deductions. It wouldn’t matter (tax-wise) whether you donated the money or not. 

Even if you gave $20,000, or $500 more, you’d only get $500 worth of deduction for that $20,000 gift. You’re better off by far, simply donating straight to the charity from your IRA via a QCD than by taking the money out, paying taxes, and then not getting the deduction. On a $20,000 gift, those taxes could cost something like $6150 in Oregon. On top of which, you might owe taxes on more of your Social Security than you otherwise would. 

If you have a taxable brokerage account with long term capital gains, there is another good option. You can gift the shares directly to charity, rather than sell, pay taxes, and then donate what’s left. On a $20,000 gift, you might pay something like $4750 in unnecessary taxes if you do it the hard way. But if you transfer the shares directly, you get the full deduction for the market value of the gift. 

If you were thinking about donating $20,000 of cash, but have some long term gains in a taxable account (aka a JTWROS, TOD, POD, or individual account), donating stock works better than donating cash. Just gift the stock, then buy back the positions with the $20,000 cash you would have donated. The benefit is you end up with fewer deferred capital gains in your portfolio and a lower tax bill when you go to resell those positions.  

Another great approach is a donor-advised fund (DAF). It’s similar to what I just described, only you continue to control the funds for years to come. DAFs make sense when you have a large, concentrated stock position and/or a high tax year where you could make use of large deductions. You can claim the deduction all in one year, diversify the holdings inside the DAF, and then spread your gifts out over many future years. The funds can continue to grow while you continue making gifts to the charities of your choice. Again, it makes sense for those who are charitably inclined, who have a large windfall gain that they want to diversify and also receive a tax-deduction for. The only catch is that it is still, you know, giving the money away. You can no longer spend the money on yourself. 

Lastly, many of my clients have kids and grandkids that they want to make some gifts to. There are a few strategies here which I would recommend. 

First, with grandkids, one of the best things you can do to help set them up is contributing to a 529 account for college education. The money grows tax-deferred until they reach college age, and then can be used for education expenses. The contribution limits are very high, but generally people choose to limit their contributions to the $19,000 per year, per person, per donor rule (ie, the IRS gift exclusion limit), so that they don’t have to report the gifts on their taxes. That said, a married couple can contribute $38,000 per year, per kid, so you can get really quite a lot of money into these accounts. You can also “superfund” the account, by making 5 years of contributions all at once, and do so without triggering gift tax reporting on your taxes. So that married couple could conceivably put up to $190,000 into the account of each grandkid in each year. In other words, for the vast majority of people and education needs, there is not functional limit to contributions. 

BUT! Keep in mind how much will actually be used. Unused amounts are subject to taxes and penalties when you take it out. Potentially you could leave a lot of money tied up in these accounts, where it can’t really do you a lot of good until you pay those penalties and fees. 

One relief valve for excess funds is that unused amounts can be converted to a Roth IRA for the student’s benefit after they turn 25. You can do up to $35,000 per kid, but that’s a lifetime limit. So aim for some leftover funds, not a lot. 

Another good option for kids/grandkids is the “Trump account.” For my Portland-area clients, please look past the name to see the potential benefit for your family. You can contribute $5000/year per kid to a tax-deferred account that converts to an IRA when your kids turns 18. Why does this matter? Because $5000 invested in stocks from age 0 to age 70 grows 80x in real, inflation-adjusted terms. So $5000 growing at the historical equity premium to inflation (roughly 6.5% per year, on average), becomes $410,622. In other words, a single $5000 contribution sets up your grandkid for a better retirement than most Americans have set aside for themselves. 2 or 3 years (or $10,000-$15,000 of contributions) provides a very good, basic standard of living for them as they reach old age. That is a fantastic benefit. 

Finally, you can directly gift cash and investments to kids, friends, cousins, grandkids, whoever. This is subject to the $19,000 gift exclusion limit per year, per person, per donor. This gives you a lot of latitude, because if you’re a married couple, giving money to your kid and their spouse, you can do $19,000 times four, or $76,000 of gifts per year. 

A couple notes here. One, you can gift appreciated stock and that will count the same for gift tax purposes as gifting an equivalent amount of cash. This comes with a few, mostly psychological/behavioral benefits. First, you don’t have to worry about them actually getting that money invested on their own, it comes pre-invested. There is no opportunity for some of those funds to get used up by “just this once” expenses. Second, you can show them the growth that money has already had, which hopefully encourages them to leave it to continue growing. Third, there is a further incentive for them not to sell it, because they would owe taxes by doing so. This promotes good investor behavior. But then, even if they do liquidate it, they’ll presumably pay lower taxes on it than you would, being in an earlier, lower-income phase of life. So your worst case scenario can still carry some benefits.