Optimizing the Impact of Your Wealth: Strategic Gifting Solutions
Gifting is more than a gesture of generosity; it can be a powerful strategy that allows individuals and families to maximize the impact of their wealth, reduce tax liabilities, and create a legacy aligned with their values. For ultra-high-net-worth individuals, executives, and business owners, understanding an effective gifting strategy can unlock opportunities to support loved ones, philanthropic causes, and even enhance their financial plans. This guide explores several sophisticated gifting options and how each can be leveraged for your benefit.
1. Gifting Appreciated Securities
Overview:
Gifting appreciated securities, such as stocks, can be an efficient way to transfer wealth while minimizing capital gains taxes. When you donate appreciated assets, you avoid the capital gains tax you would incur if you sold the securities, and you may also receive a charitable deduction.
Key Benefits:
- Avoids capital gains taxes on appreciated securities.
- Potential charitable deduction based on the fair market value of the securities (must be long term positions).
- Supports your favorite charitable organizations directly.
Considerations:
- Must donate to a qualified 501(c)(3) organization to receive the deduction.
- Limitations apply to how much you can deduct in a given year based on your adjusted gross income.
- It’s essential to understand the holding period and the type of asset being gifted (e.g., long-term vs. short-term gains).
Example/Case Study:
Imagine you own shares worth $500,000 that you purchased years ago for $200,000. If you sold the shares, you would owe taxes on the $300,000 gain. By gifting the shares directly to a charity, you can eliminate the capital gains tax while potentially qualifying for a charitable deduction equivalent to the full $500,000 fair market value.
2. Gifting from Required Minimum Distributions (Qualified Charitable Distribution – QCD)
Overview:
For individuals aged 70½ or older, gifting directly from an IRA through a Qualified Charitable Distribution (QCD) can be a tax-efficient way to satisfy your Required Minimum Distribution (RMD) while supporting a cause you care about.
Key Benefits:
- Reduces taxable income by directing RMDs to charity.
- Counts towards satisfying your RMD requirement.
- Simplifies the gifting process for retirees who wish to support their favorite charities.
Considerations:
- The maximum annual limit for QCDs is $100,000 per person.
- The QCD must go directly to the charity—personal withdrawals disqualify the tax benefit.
- Not all charities qualify; private foundations and donor-advised funds are excluded.
Example/Case Study:
A business owner with a $1 million IRA who must take an RMD of $40,000 decides to donate this amount through a QCD to a qualified charity. This strategy keeps the $40,000 out of taxable income, allowing them to fulfill their RMD without increasing their tax liability.
3. Donating Business Interests
Overview:
Business owners looking to make a significant charitable impact may consider donating a portion of their business interest to a donor advised fund (DAF, see below). This approach can provide tax benefits while aligning with succession and estate planning strategies.
Key Benefits:
- Deducts the fair market value of the business interest, reducing taxable income.
- Removes the asset from the taxable estate, potentially reducing estate taxes.
- Supports philanthropic goals and engages in legacy planning for family businesses.
Considerations:
- Valuation is required to determine the fair market value of the business interest.
- Donating business interests may affect control and operations, so planning is essential.
- Certain restrictions apply when gifting interests in S-corporations or LLCs.
Example/Case Study:
An entrepreneur donates 10% of their company’s shares valued at $2 million to their DAF. By doing so, they receive a tax deduction based on the fair market value of the shares while reducing their estate’s taxable value. This move aligns with their long-term goals of supporting a cause and transitioning ownership in the business. If they sell their business, the DAF pays no tax on the sale.
4. Charitable Remainder Trusts (CRTs)
Overview:
A Charitable Remainder Trust allows you to make a charitable gift while retaining income for a set period. This strategy provides immediate tax benefits, generates income, and ultimately supports the charitable cause after the trust term.
Key Benefits:
- Provides a stream of income for a set term or life.
- Immediate income tax deduction based on the present value of the charitable remainder.
- Reduces estate taxes and potentially removes appreciating assets from your taxable estate.
Considerations:
- Requires setting up and managing a trust, which may involve administrative costs.
- CRTs are irrevocable, meaning you cannot change the terms once established.
- The payout rate affects the charitable deduction and the trust’s longevity.
Example/Case Study:
A retiree sets up a CRT with $3 million in appreciated stock. The trust pays them 5% of the trust’s value annually for their lifetime, providing a steady income stream. After their passing, the remaining assets go to their chosen charity, leaving a lasting legacy while optimizing tax benefits during their lifetime.
5. Donor-Advised Funds (DAFs)
Overview:
A Donor-Advised Fund offers a flexible way to manage charitable giving. You can contribute cash, securities, or other assets and receive an immediate tax deduction while deciding over time which charities will receive grants from the fund.
Key Benefits:
- Immediate tax deduction for the amount contributed.
- Assets within the DAF grow tax-free, maximizing the impact of future grants.
- Allows for strategic, long-term charitable planning.
- Reduced reporting on tax returns
Considerations:
- Contributions are irrevocable and cannot be reclaimed once made.
- Grants from DAFs cannot be made to private foundations or political organizations.
- Requires careful planning to align the DAF’s growth with your philanthropic goals.
Example/Case Study:
An executive contributes $1 million to a DAF, receiving an immediate tax deduction. Over the next decade, they recommend grants to various charitable organizations, using the fund’s growth to increase the overall impact of their contributions.
Conclusion:
For ultra-high-net-worth individuals, executives, and business owners, strategic gifting is more than just a financial tool—it’s an opportunity to amplify your influence, protect your wealth, and shape a lasting legacy. By partnering with Waverly Advisors, LLC, you gain access to tailored strategies designed to align your financial and philanthropic goals, ensuring your wealth works harder for you and the causes you care about. Contact us today to explore how you can maximize the impact of your gifting plan.
If you would like more information about the terms and strategies discussed in this guide, or if you’re ready to explore how they apply to your specific situation, contact Waverly Advisors. With experience working with individuals, families, and executives managing significant wealth, we specialize in creating tailored strategies to help you grow, protect, and transfer your assets effectively.
MEET THE AUTHOR
Grant W. Cardwell, CPA
Partner, Wealth Advisor
Grant is a leader of the High Net Worth Client Service Team, continuing his focus on tax planning and consulting after spending seven years in the Firm’s Tax Department. By building relationships, understanding each client’s specific situation, and listening to their specific needs, he is able to guide clients through tax-conscious comprehensive financial planning, helping them achieve what is important to them. Grant resides in Birmingham with his wife Jill and two daughters….. Learn More
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