It’s the most wonderful time of the year! Lights are twinkling, bells are jingling, and gifting is on the schedule. But before you fire up those charge cards, consider who you are gifting, and why. Without killing the holiday vibe, there’s one gift that everyone needs: money. It’s one-size-fits-all, portable (transmitted electronically!), and never gets stale. One school of thought says that giving cash isn’t festive, original, personal, or creative enough. Wait, for real? Gifting cash or other assets to family members while you’re living can be a great way for you to actually witness those family members benefitting from those gifts. While it’s true that a hand-crocheted afghan may be more personal, in our experience a hand-addressed envelope filled with cash or a Treasury Bill receipt, or a personalized statement of deposit regarding a financial asset sent via email, is warm, fuzzy, and personal enough!

Gifting cash to family members can be a significant component of an overall estate plan. If you’re feeling old-school, then of course currency is an obvious option, but there are smarter ways to gift money that will benefit both the recipient and yourself.

Tax on gifts

Of course, there is no such thing as free money. The Internal Revenue Service (IRS) has rules regarding how much money you’re allowed to give without paying tax on that gift. The IRS rules on gifting money are laid out in a piece of legislation called the “gift tax.” For 2023, the gift tax exclusion has been set at $17,000 per person per year for an individual filer. Cash gifts can be subject to tax rates that range from 18% to 40% depending on the size of the gift. 

Some cash gifts, like paying for someone’s tuition or medical bills, are excluded from any tax requirement. To be eligible for this exclusion, however, you must give the gifts directly to the school or health care provider. Keep in mind that cash doesn’t actually have to change hands for a gift to have tax implications. If you’re paying for an adult child’s wedding or a fabulous vacay for your sis, that generous gesture will trigger the gift tax.

As noted, the annual exclusion threshold for gifts made in 2023 is $17,000 per recipient—and your lifetime exclusion means you can gift up to $12.92 million over the course of your lifetime tax-free—GTK, right? If you file jointly with a spouse, you can give up to $34,000 per recipient in 2023. This number changes annually.

If your gift exceeds the exclusion limit, you’ll need to file Form 709 to report the “excess” gift to the IRS. You need to complete and submit Form 709 for any year that you make a taxable gift. Sending in the form doesn’t necessarily mean you’ll have to pay anything on the gift; it’s just the form you’ll need to use to declare the gift.

If the IRS lets you know that you’ve got to pay tax on your monetary gift, they’ll tell you how much you owe, and you can pay in a number of ways immediately, or via an agreed payment plan.

These payment methods include:

  • Pay online when you e-file your return
  • Direct pay from your checking or savings account
  • Credit or debit card online, over the phone, or via mobile
  • Pay with cash at a participating IRS retail partner
  • Pay in monthly installments online using the IRS Online Payment Agreement tool

What are the responsibilities of someone who receives a monetary gift?

When it comes to reporting gifts and paying any taxes due, the burden initially falls on the person making the gift. However, the gift tax can apply to both cash and noncash gifts, and may require some financial participation by the recipient. If you receive a noncash gift, you may end up paying a capital gains tax on a portion of its value, even if it falls below the gift tax exclusion figure.

For instance, let’s say someone gives you stock valued at $10,000, but they spent only $1,000 to buy it. When you sell those shares, your capital gains will be calculated based on the original purchase price. This amount is known as the basis. If you sell the stock for $10,000, you’ll pay capital gains tax on $9,000, which is the sale price minus the basis.

In some situations, such as the gift of a home, the recipient could be facing a significant capital gains tax if they sell the property. But if you’ve inherited a house (instead of receiving it as a gift), you can avoid this tax burden, since the basis for inherited property is reset to the market value at the time of the owner’s death.

Gifting to a minor child

A great way to gift money to a minor child under the age of 18 is through creating a custodial account.

A custodial account is an investment vehicle that enables you to save assets for a named beneficiary until they come of age. Whoever sets up the account acts as the custodian of the account assets and manages the funds in the account. 

Depending on what the recipient does with the gift, there may be future tax implications, such as paying capital gains tax on an investment. But someone accepting money – even in excess of the annual exclusion amount – doesn’t have to worry about reporting it to the IRS. However, for documentation, it’s important to keep records of all these transactions in the form of account statements and any tax filings that may go with them.

Three ways to gift your Alma Mater

The best way to give depends on many variables, including the size of the gift, its intended impact, and your financial circumstances. Many forms of gifts exist besides cash: securities, real property, and a stream of income for a designated period. Finally, it’s possible to make a gift today that does not go into effect until the future.

1 – The Basics

Most educational institutions have an “Annual Fund” for operating expenses. Alums receive regular appeals for contributions, usually at year-end. These gifts are generally “unrestricted,” meaning the college or university decides how to use your money.

Just because they are small, your gift can still be strategic, from both the donor’s and donee’s (great Scrabble word, meaning you!) perspective. Rather than giving cash, you can contribute an appreciated security of approximately the same value. If you were instead to sell that security and give proceeds to your school, you would owe capital gain taxes on the appreciation, thereby reducing the gift amount or other resources. Check with the college giving office to see if there are matching funds given by other alums trying to bulk up the annual giving program.

A more strategic option is to establish a donor advised fund, through a community foundation, or custodial broker or mutual fund. Let’s suppose you give annually to your school, but this year expect a one-time bump in income, due to a property sale or large bonus. You’d like to offset the nonrecurring income with a charitable deduction. In this case, you might consider establishing a donor-advised fund into which you put several years of your annual college gift. In the year you fund the account, you’ll get a charitable deduction for the full amount, even if you then direct the custodian to draw out a lesser amount each year to give to your school.

2-  Planned Giving

As the term implies, this gift category requires careful planning and thinking. Often it involves taking an asset and splitting its value between two beneficiaries, one of which is your alma mater, or designating assets to be gifted once you or your family no longer need them. Examples of this type of gifting include: 

  • Naming your alma mater as a primary or secondary beneficiary of your life insurance
  • Designating your school as a primary or secondary beneficiary of your IRA or retirement plan
  • Purchasing a charitable gift annuity whereby you receive income for a specified period, with any remaining value then transferred to the university or college

Where the planning and thinking get more complex is when gifts are made from a trust. One type of trust, called a charitable remainder trust (CRT), is usually funded with appreciated assets which are then sold and reinvested to provide the donor or trust settlor with an income for life. When this person passes on, the corpus as it’s known, meaning the assets, in the trust is then transferred to the settlor’s alma mater. Another type of charitable trust works in an opposite manner. Called a charitable lead trust (CLT), it is set up to provide the college or university with income for a specified period, with the remainder reverting back to the donor or her family at the end of the term.

Because of the complexity and expenses involved in setting up these charitable trusts, they are generally reserved for gifts of $100,000 or more. Tax benefits are associated with both types of trusts; in the case of the CRT, the present value of the remainder interest that goes to your alma mater can be taken as a charitable tax deduction in the year the trust is established. The income tax implications of a CLT are a bit more complicated, depending on whether the trust is set up as a grantor or non-grantor trust. Often, the primary goal of CLTs is not to minimize taxable income, but as a way to transfer a sizeable estate to beneficiaries without incurring gift or estate taxes. Bottom line: this kind of gifting requires careful explanation, crafting, and coordination by your financial planning professional and an attorney.

3 – Visionary Gifts

OK, it’s getting serious now.  These gifts are generally very large and intended to build the future stability and prosperity of the educational institution. You know, a library or a hospital wing named after you. In addition to consulting with tax and financial planning professionals about these gifts, alums need to work closely with the institution’s leadership to ensure that their gifts reflect their intent as well as serve the important needs and philosophy of the school.

Many colleges and universities have capital campaigns to improve their infrastructure as well as endowment funds. In the case of an endowment, the goal is to create a permanent base of invested capital to generate income for both current expenses as well provide resources for longer-term projects. 

For example, a college may have an endowed scholarship or an endowed professorship. In giving to these endowments, you are effectively giving money intended to make money forever for these specific purposes. Given the sums involved, donors making gifts of this size often want to direct how the money will be used, seeing it as a perpetual personal memorial.

Start here:

Unless you’re literally stuffing a Christmas stocking with crispy new Benjamins, in which case we want to please, please add our names to your list, the preparations require some time and thought, meaning that you may not have the entire deal signed, sealed, delivered in time for December 25.  Do make an effort, however, to initiate prior to the end of 2023, since the tax structure and other requirements are likely to change in 2024.

There’s nothing that says you can’t combine a tangible Christmas present with a more abstract monetary gift that will “keep on giving” well into the next year. Print out a piece of relevant banking paperwork regarding your monetary gift and place it inside a tin of cookies, or with a set of ear-buds, in the pocket of a jacket, or tucked under the laces of a new pair of sneakers.  Or just enclose a note that says, “I.O.U. , XO, Me.”,  listing the amount. And enjoy explaining to the blessed recipient what is to come as we all lift a glass of holiday cheer together.

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