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Tax-Advantaged Lifetime Gifting Strategies

Acts of generosity while you’re alive allow you to witness the benefits firsthand, says Kim Frank, an Orlando, Florida–based wealth strategist at Schwab. “That way, your gift can be enjoyed right away—and there are often tax advantages as well.”

If the inheritance your heirs receive is subject to the estate tax, for example, they may not receive all you’d hoped for. “Gifts given during your lifetime can grow in value in the hands of the recipient, rather than yours,” explains Hayden Adams, CPA and director of tax and financial planning at the Schwab Center for Financial Research, which can help reduce the overall size of your taxable estate.”

Cash

Consider the annual gift-tax exemption. In 2018, individuals can give up to $15,000 per person ($30,000 for married couples) to an unlimited number of people without incurring federal estate or gift taxes. (Even this is a bit of a false limit, since anything in excess of that amount merely counts against your lifetime exemption of $11.18 million per individual or $22.36 million per married couple.)

“This is perhaps the easiest way to dispose of assets,” says Kim, whose clients frequently give money directly to their children or to a 529 college savings plan for a grandchild. “And if you choose to contribute to a 529, you can bundle five year's worth of gift-tax exemptions into a single contribution.”1

In addition to the annual gift-tax exemption, you may contribute an unlimited amount without tax consequences to:

  • The medical bills of another individual.
  • The tuition bills of another individual.
  • A qualified charitable organization of your choosing.

In the first two instances, funds must go directly to the institution rather than the patient or student, lest they be subject to the annual gift-tax exemption.

If you plan to donate to one or more charitable organizations, on the other hand, doing so through a donor-advised fund (DAF) can help maximize your impact over time. That’s because your tax-deductible contributions can be put to work in the market, potentially growing the pool of assets on hand to support the organizations you care about.

Stock

The price you paid for a stock—that is, its cost basis—determines how much in capital-gains taxes you might owe when you sell. When you give a stock during your lifetime, the recipient’s cost basis is the same as yours. But when you pass on stock as part of your estate, the cost basis generally resets to the value of the stock at the time of your death, greatly minimizing the taxable gains for your heirs.

The reverse logic holds true when it comes to charitable giving. “If you plan to give appreciated stock to charity, it may make sense to do so during your lifetime so that you can capture the greatest possible deduction while also sidestepping any capital gains,” Kim says.

Gifting appreciated assets to a DAF can be especially advantageous. You can make grants to qualified charities at your convenience and, because you’ve transferred ownership to the DAF, you pay no capital-gains tax when the assets are sold.

Real estate

As with stocks, gifting appreciated real estate to an individual during your lifetime means passing on your cost basis to the recipient, which could result in a hefty tax bill should he or she sell the property.

Donating real estate to a charity, by comparison, often allows you to take a deduction equal to the fair market value (based on a qualified appraisal) and avoid the capital gains you might have realized from selling the property.

As with appreciated investment assets, gifts of real estate to a DAF can sidestep capital-gains taxes while maintaining maximum flexibility as to when and to whom you donate the proceeds.

Your giving plan

Of course, as any philanthropically minded person can attest, giving is about more than just the potential tax advantages.

“Yes, you want to be smart from a tax perspective,” says Kim, who suggests consulting a tax professional to consider how best to maximize your giving. “But knowing that you’ve helped a loved one or a charity you’re passionate about can be hugely rewarding in and of itself.”

 

1To validate a five-year lump-sum gift, the taxpayer must file a federal-gift-tax form and indicate that the gift should be treated as single-year contributions over five years.

 

What You Can Do Next

Need help thinking through your gifting strategy? Call 800-355-2162 to speak with a Schwab investment professional.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Schwab wealth strategists are employees of Schwab Private Client Investment Advisory, Inc., a registered investment advisor and an affiliate of Charles Schwab & Co., Inc.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation.

Contributions of certain real estate, private equity or other illiquid assets may be accepted via a charitable intermediary, with proceeds of your donation transferred to your donor-advised account upon liquidation. This intermediary considers donations on a case-by-case basis, and assets typically must be valued at $250,000 or more. Call Schwab Charitable for more information at 800-746-6216.

Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.

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