This is the time of year that many of us take a pause in our busy lives to ponder what we are thankful for.  One of the many things that I am personally thankful for is people’s willingness to share their blessings with others. I was the beneficiary of generosity at a pivotal time in my life when I was awarded an Evans Scholarship to Miami University. That amazing gift instilled in me a desire to give back and to help my clients do the same. 

We spend much of our lives focused on accumulating wealth and inevitably come to the realization that we can’t “take it with us” when our time on Earth has expired. Ultimately, all the fruits of our labor will go to some combination of the government (via taxes), our heirs, or charities of our choosing.  

Most of our clients at Bartlett Wealth Management prefer to maximize the portion of their estate that will go to their heirs and/or to charity. This may be accomplished with some of the basic planning techniques below.

Annual exclusion gifts

Under current tax code, an individual can give someone else up to $16,000 per year ($17,000 in 2023) without having to file a gift tax return.  Therefore, a married couple can gift $32,000 per year ($34,000 in 2023) to an individual.  It is a common practice for high-net worth individuals to take advantage of this annual exclusion and distribute assets to their children, grandchildren, and/or other family members.  This strategy allows the recipient to access funds when they might need them the most and decreases your taxable estate over time. 

529 plans

Arguably, one of the best gifts you can give someone is an education.  A 529 account is an education savings plan that allows your after-tax gifts to be invested and any growth is nontaxable assuming withdrawals are used for qualified education expenses.  The IRS’s definition of a qualified education expense at the college level is rather broad and includes tuition, fees, room and board, books, supplies, computers and internet access.  

Previously these plans were reserved for college expenses only.  However, following the Tax Cuts and Jobs Act passed into law in 2017; you can pay for up to $10,000 per year of K-12 tuition. 

Contributions to a 529 plan are not exempt from the annual exclusion limit ($16,000 per year, per individual in 2022; $17,000 in 2023).  However, there is a provision allowing individuals to contribute up to $80,000 in one year ($85,000 in 2023) and have it spread over five years for gift tax purposes.  Please consult with your tax professional for further details.

Appreciated stocks

Gifting of appreciated stock is much more tax-efficient than giving cash.  As an individual, you are subject to either short-term or long-term capital gains tax when you sell appreciated stock.  However, qualified non-profit organizations are not subject to this tax.  So, by giving long-term appreciated shares of stock to a charity, you eliminate the associated capital gains tax and the non-profit realizes the full value of the gift.  

Donor advised funds

One of my favorite strategies is the creation and funding of a donor advised fund (DAF).  Using this tool, a donor realizes a charitable deduction for the current tax year upon transferring assets to their DAF.  This can help facilitate “gift bunching” for taxpayers that aren’t able to itemize every year.  The assets in the DAF are invested according to your preferences and grow tax-free until distributed to a qualified public charity.  You can request charitable distributions from your DAF at any time or choose to let it accumulate. 

It is important to note that a gift to a DAF is irrevocable and the assets are technically no longer yours. 

Qualified charitable distributions

A qualified charitable distribution (QCD) is a direct gift from an IRA to a qualified charity.  This is a popular technique used to help satisfy required minimum distributions (RMDs), while also reducing taxable income and achieving philanthropic goals.  In order to make a QCD, you must be 70 and a half years or older and the maximum annual amount is $100,000 per person – not to exceed your ordinary taxable income. 

In order to qualify for a QCD in the current tax year, the funds must come out of your IRA by December 31^st.  It is also important to know that funds distributed directly to you from your IRA and then gifted to charity do not qualify as a QCD.  Your IRA custodian must make the gift directly to the non-profit organization.