Strategies to Maximize Wealth Distributions to Families and Charities

Imagine you are performing your due diligence in your estate planning. You need to come up with a strategy to maximize both your charitable and family distributions. What is the best strategy to meet tax requirements, while efficiently distributing assets to each group to continue your legacy?

As it turns out, this is not an uncommon situation, and there are several approaches one can take to satisfy both needs.

Annual Exclusion Gift

The first step in planning a gifting strategy is to know the rules. There are tax-free gifts that can be made without filing any paperwork with the IRS, provided they meet the following requirements:

  • The Internal Revenue Service increased the estate and gift tax limits in 2015. The new federal estate tax exemption rises to $5.43 million per person, and the annual gift exclusion amount remains at $14,000 per donor, and can be made to as many people as you like. These annual exclusion gifts don’t count towards the lifetime gift exemption of $5,340,000.
  • To gift more than $14,000 to a single individual, file IRS Form 709, otherwise known as the Gift Tax Return.
  • Once gift amounts exceed $14,000 per donor, the amount you can leave, tax-free at death, reduces (currently capped at $5,340,000), unless you split gifts with your spouse. If you are both gifting, you may give a total of $28,000 tax-free, but you must file IRS Form 709.
  • As the gift tax is linked to the estate tax, you should keep records of your gifts. Note that gift maximums apply per donor, so a married couple each get their own exemption. Therefore, a couple will be able to give away $10.86 million tax-free in 2015 to meet their maximum lifetime gift exemption (assuming they haven’t made prior lifetime gifts). The top federal estate tax rate is 40%.
  • Note that the gift exclusion rule only applies in 19 states, plus the District of Columbia, which imposes separate state death tax levies. See for the states which require adherence to the exclusion rule.

Start a Roth IRA

If you want to gift to a young child, starting a ROTH is a good option to consider. In doing so, if your granddaughter earns $1,000 as a lifeguard, for instance, and would otherwise qualify, she could set aside $1,000 into a Roth IRA. Alternately, if she saved half of what she made, you could gift a matching contribution of $500 to allow her to put the full $1,000 into the ROTH. Kids need to earn money if you are going to contribute to an IRA on their behalf. For the 2014 tax year, the limit for a Roth IRA contribution for those under 50 is the lesser of the worker’s earnings or $5,500.

Pay College Tuition or Medical Bills

You can make gifts for medical, dental, and tuition expenses, for as many relatives (or friends) as you’d like, if you pay the provider directly. These gifts don’t count toward any of the limits. Paying these bills are the only two exceptions to the annual gifting limit. If you pay medical expenses or college tuition directly to the institution or provider, the $14,000 limit for each person does not apply.

Gift Appreciated Assets to Lower Income Tax Brackets

Children under the age of 19, and college students under 24, are subject to the “Kiddie Tax.” This is a tax that is levied on unearned income (interest, dividends, and capital gains). The first $1,000 is offset by a $1,000 standard deduction, while the next $1,000 is taxed at the child’s tax rate. All of the child’s unearned income, in excess of $2,000, is taxed at the parent’s tax rate. According to the IRS, this tax goes into effect when the child’s interest, dividends, and other unearned income, total more than $2,000. Then, part of that income may be subject to tax at the parent’s tax rate instead of the child’s tax rate. If the child’s interest and dividend income (including capital gain distributions) are less than $10,000, the child’s parents may be able to elect to include that income on the parent’s return, rather than file a return for the child.

State Income Tax Deductions for 529 Plan Contributions

Some states allow income tax deductions for these types of contributions, subject to certain limits. If you are in one of these states, it pays to take advantage of these deductions.

Gifts to a Public Charity via a Charitable Roll-Over

Gifts to 501(c)(3) charities allow you to deduct charitable gifts and cut taxes. A charitable rollover is a circumstance in which you give to a public charity from your IRA. This occurs when a donor is over the age of 70 ½ and has to make a required minimum distribution (RMD). The charitable roll-over allows the donor to make the contribution to the 501(c)(3) to avoid paying ordinary income tax. In this case, the money comes directly from the IRA, and a distribution is made directly to the charity; it is not taxable and does not bump the donor into a high tax bracket. The requirement is that the donor must be at least 70 ½ years old and this strategy maxes out at $100,000 annually.

Gifting to Charity

Here is how it is done: you own real estate, stocks, or bonds, that have appreciated. If you sold these appreciated assets, you would pay a capital gains tax of 15% and possibly other taxes. If you are a high wage earner, you can pay up to ¼ of the gain yourself. However, if the asset sale is made by a charitable entity (501(c)(3), you do not pay any taxes, yet the financial benefit accrues entirely to the charity.

Charitable gain harvesting

If an asset appreciates, and you want to keep the stock and the gains, you can donate the appreciated stock or mutual fund at full market value to the charity. You can then re-purchase the asset immediately. When this is done, the cost goes to the charity and they pay no tax on the gains. The donor then purchases the asset at a lower cost and you eliminate the gain. For example, if you have a $100,000 gain and are in the 23.8% tax bracket, you make a charitable gift to the 501(c)(3) and then repurchase the same shares, at the same cost at which you bought it, while the charity benefits from the asset value.

Create a donor-advised fund

This is a special charitable account, and any assets taken into the account can be deducted immediately at full market value, in most circumstances. Assets in the fund can remain in the donor-advised fund for as long as you want. But since it is an advised fund, you do not have total control over the distributions. However, you can have input into the distribution of the advised fund assets to designated charities.

Remember, make distributions early in your life so you can see some benefits from your largesse. It’s best to see the positive impact of your donation while you are still alive, so plan accordingly.

Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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