Photo of Ray Ferrara CFP Ray Ferrara CFP Oct 01, 2020

Charitable Giving This Holiday Season

As we approach the holiday season and the end of the year, our thoughts turn to gifts for family and friends, and maybe they are asking you for a list of gift-giving ideas too.  So, here are a few thoughts on financial gift-giving.

In 2020, you may make a gift up to $15,000 each (adjusted for inflation annually) to as many people as you want without incurring a gift tax, having to file a gift tax return (in most situations), or the necessity of using part of your lifetime exemption of $11.58 million.  A couple can double that amount.  Let us say you have three children.  That means you jointly can transfer $90,000 of wealth to them and another $90,000 to their spouse and $30,000 to each grandchild should you desire.

But it gets even better!  Suppose you do this over a five-year period.  You will have transferred $150,000 to each child for a total of $450,000.  If the child invests the money at a hypothetical return of 5%, it will be worth $165,750 for each. In ten years, it will grow to $377,300 and in twenty years it will almost reach $1 million.  What a nice nest egg for retirement.

But it gets even better!  If you have a grandchild attending a private school or going to college, you have additional opportunities.  Regardless of how high the qualified expenses might be, if you make a payment directly to the school, the amount of the gift is unlimited.  If qualified educational expenses are $50,000 a year for college, you can transfer $200,000 of wealth.  If the grandchild goes to a professional or graduate school, it could be a whole lot more.  What a gift!  All that education and no debt in starting a professional career.

But it gets even better!  In the alternative, for younger grandchildren, you can contribute to a 529 education account that grows tax-free if the money is withdrawn for qualified education expenses.  You can even jump start this program by putting in five years of gifting at one time – $75,000 per grandparent.  Thus, a $150,000 gift from loving grandparents at the time the child is born would be worth $360,000 at age 18 assuming the same hypothetical return.  The only catch here is that you cannot make an additional gift for the subsequent five years to the same grandchild.

But it gets even better!  Suppose the grandchild does not need the money in the 529 plan because she/he gets a scholarship, goes to college but does not use all the money, or does not go to college at all.  What happens?  The money can be used for a post-graduate education or passed on to siblings and other family members for their use.

But it gets even better!  Suppose that you make the gift to someone with earned income and he/she qualifies for a Roth IRA which grows tax-free.   For someone under age 50 who qualifies, the recipient can put $6,000 a year into a Roth IRA.  That gift at our 5% return given at age 22 is worth almost $49,000 at age 65.  Do this every year for the next ten years and the retirement fund will have grown to $183,000.

But it gets even better! Suppose you have a great deal of wealth and you want to give more than $15,000 per year.  Say you are age 65, expect to live at least another twenty years, and you want to give $1 million.  Then the first $15,000 will be considered an annual gift and the remaining amount will use part of your lifetime exemption of $11.58 million.  There is still no gift tax, but you will have to file a gift tax return.

But it gets even better!  That million dollars over the next 20 years at our 5% return grows to $2.65 million.  Thus, you removed not $1 million from your future estate, but $2.65 million.  Assuming you have a taxable estate, this could save over $1 million in potential estate taxes.

We have lots of other gift-giving ideas, so why not give us a call for a complimentary consultation in either our Clearwater or Tampa office. Happy Holidays!