We always get a lot of questions surrounding gifts. Most of the questions are about either charitable giving or family gifts.
Starting with gifts to family, the tax code permits annual gifts to be excluded from gift taxes if it’s less than $17,000 per donor and donee. That means you can give up to $17K to your child, their spouse and any of their children. For married couples looking to make gifts, each spouse has their own $17K limit which doubles the amounts just referenced.
Think about the intent of the gifts before you make them. If the gift is to help buy a home, then cash may be best. If the gift is to be a long-term investment, perhaps you can gift the actual asset? When you gift an asset, the recipient gets what is called a carry-over basis. That means the cost in the hands of the recipient is the same as it was in the hands of the donor, with no capital gains tax realized at the time of the gift. The recipient will eventually pay the tax when they sell the asset. The asset can be interests in a business, real estate, stocks, or any property.
There are exceptions to the annual gift limit for health care, education, and spouses. Anyone can gift an unlimited amount to their spouse. Also, you can write checks directly to an educational or health care organization for anyone without impacting your $17K annual limit. This is very handy when it comes to helping with expenses for grandchildren or extended family members.
Gifting minority interests in businesses or investment real estate may also be ideal. With this strategy, you can make a gift today without impairing your control over the asset. For example, if your building is worth $1 million, you can give a 1.7% interest in the property and still control everything about it. An LLC or partnership agreement should also be in force to outline the rights and obligations of the parties. This agreement will be very important in the event of a death, divorce, or any other disagreement with your minority owner.
There are big benefits to giving property to a charity, especially highly appreciated property, instead of cash. The real benefit is that you will get a deduction for the fair market value of the investment on the date of the gift, even if your cost basis is just one penny! Let’s say you were an early investor in XYZ Company, which is now a high-flying company worth a lot. Gifting shares in the company helps you to lighten your concentrated position while keeping your cash intact. Check with your desired charity to be sure that they are a qualified charity and can accept appreciated securities instead of cash.
John P. Napolitano CFP®, CPA, PFS, MST is Founder and Chairman of Napier Financial in Braintree, MA. Visit napierfinancial.com for more information. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Legal counsel should be consulted for specific advice or recommendations about any individual’s personal legal circumstances. Investment and financial planning advice offered through US Financial Advisors and Great Valley Advisor Group, Registered Investment Advisors.