If You Plan to Gift -- Get Started

10/23/00

December 31 is right around the corner. It's time to think about making those gifts you have been thinking about since January.

Do you have an organization that is doing many good things and you would really like to support? Have you made a commitment to contribute dollars but haven’t gotten around to it? Do you have a pretty hefty income tax bill and don’t quite know how to deal with it? Are you concerned about the size of your estate and the amount of dollars the IRS will get?

If you answered yes to any of the above, it is time to get started with your annual gifts. There are two basics types of gifting to think about.

The first is charitable gifting. Gifts to a charitable organization provide great benefits at several levels. It gives you the opportunity to support an organization that you personally believe in and can help make the organization more successful. It also provides you with an income tax deduction and assists you in reducing your taxes.

You have until December 31 to complete your gifts for them to count in the current calendar year. If you want to make a contribution to your alma mater or to your local Red Cross or to your church, you must pay it before the end of the year. If you make a pledge, it doesn’t count for a deduction in the current year.

And before you write that check, think about the special advantage to giving away appreciated property such as stock. You can earn a write-off for the current value of the stock rather than what you originally paid for it, and you avoid having to pay the capital gains tax on the profit that has built up while you have been holding it. This can be substantial if you have been holding it for many years or if it has been a fast growing company.

Think about it. You have XYZ stock or stock fund that you inherited 20 years ago or more. It has an original cost basis of $20 per share and is currently worth $100. If you sold the stock and donated the cash you would have to pay tax on an $80 capital gain per share at an estimated tax rate of 20%. Your tax liability would be approximately $16. That means you would only have approximately $84 available for the charitable contribution.

What a great deal! Gift the stock and save $16 in income tax and the charitable organization gets more money. There are limits on how much you can deduct based upon your income and the type of charitable organization, so check with your tax advisor before you make that gift.

The second is a family gifting program. The type of tax that many of us are concerned about is the estate and gift tax. Each of us has the right to give away during our lifetime or upon our death up to $675,000 in 2000 through 2001. The amount increases to $700,000 in 2002, $850,000 in 2004, $950,000 in 2005 and $1,000,000 in 2006 and thereafter.

Under this estate and gift tax law we have the $10,000 annual gift exclusion. This exclusion provides a wonderful way to gift dollars and assets to our family and other people that we care about. We each have the right to gift up to $10,000 per person per year. This means that if I am concerned about potential estate taxes, I can gift to as many people as I want as long as I stay within these guidelines. If I am married, my spouse and I can gift up to $20,000 per person per year.

An example of trying to maximize this type of gifting would be: You are married, have two married children and three grandchildren. You and your spouse can give $20,000 to each child and each child’s spouse and each grandchild equaling a grand total estate size reduction of $140,000.

Remember one very important fact about gifting to family and friends. They are not charitable organizations, even if you may think they are, and you cannot deduct these gifts on your tax return.

Now, before you start your gifting program, remember the following:

Make sure you really can afford the gifting program you start and don’t get so focused on taxes that you lose sight of other important things like having enough money to be comfortable in retirement.

Gift rapidly appreciating assets. It may make sense to move this type of asset since it will only increase the potential estate tax over time.

Think before you gift highly appreciated assets to family members. If it is an asset you intend to sell, it might make sense to transfer to a family member in a lower tax bracket. However, if you plan to hold it for the long-term, it may make more sense to keep it and let your family get a step-up in cost basis upon your death.

Remember that you give up control over any gifts that you make.

Get that program in place today. And if you are gifting assets, get those transfers moving. It takes time to transfer stocks and you don’t want to miss a great opportunity to help yourself and to help others.