Hardy Plumbing
January 03, 2007

$ & Sense

Holiday Giving Offers Tax Benefits

With the holiday season just around the corner, now might be a good time to begin thinking about a year-end gifting strategy. Show your appreciation to those you love and to charities you admire while receiving tax savings and other benefits.

How do you develop a successful year-end gifting strategy?

We have provided some basic information about both individual and philanthropic gift-giving.

Giving To Individuals

For 2006, under the annual gift tax exclusion you can give up to $12,000 to as many individuals as you choose each year. Gifts over this amount require filing a gift tax return and may incur a gift tax liability.

If you are married and you and your spouse elect to split gifts, you can give each person up to $24,000 per year tax-free. Even though these gifts are not tax deductible for income tax purposes, neither you nor the recipient will have to pay income or gift tax when the gift is made. In addition, the gifted assets and all subsequent appreciation on the gifted assets are removed from your estate, thus potentially reducing future estate tax liabilities. Outright gifts are simplest, but you may also want to consider gifts in trust, gifts to 529 college savings plans and gifts to UGMA/UTMA custodial accounts.

Giving To Charities

Most charitable gifts also provide you with a current year income tax deduction. There are several types of charitable beneficiaries, including public charities, pooled income funds, private foundations, donor-advised funds and Charitable Remainder Trusts.

A Smart Way to Leave a Legacy

One effective and popular choice for individuals who wish to leave a lasting legacy to their favorite charity but also reap various financial benefits is the charitable remainder trust. In exchange for a future gift to charity, the charitable remainder trust provides you with several major tax and economic benefits. A charitable remainder trust allows you to:

Defer capital gains taxes. Typically, a charitable remainder trust is funded with highly appreciated assets such as stocks. Because of the tax-exempt status of the trust, the highly appreciated assets can be sold free of immediate capital gains taxes. Instead, the capital gains are carried out to the current trust beneficiary as part of the regular distributions from the trust, and therefore are spread out over the whole term of the trust rather than being payable all up front.

Increase diversification and cash flow. The resulting sale proceeds from the sale of a concentrated, highly appreciated portfolio can be reinvested in more diversified assets. You (and possibly other family members) will receive regular distributions from the trust for life or a term of up to 20 years.

Receive a current-year federal income tax deduction. The deductible amount is the net fair market value of the property placed in the trust minus the present value of the payments to be made to you and/or your beneficiary. The deduction, which is available only if your trust meets all IRS requirements, is calculated using mandatory Internal Revenue Code formulas, interest rate assumptions and life expectancy tables (or the term of the trust if it is a fixed number of years).

Reduce future estate tax liabilities. Assets transferred to a charitable remainder trust are not included as a part of your taxable estate. This could reduce future estate tax liabilities faced by your family.

Remember, a charitable remainder trust is irrevocable. Assets in the trust eventually pass to charity, not to your family. You should work with your tax and legal advisors so that a charitable remainder trust, or any other year-end gifting strategy, fits into your overall estate plan. If it does, you could potentially enjoy significant tax and economic benefits as well as leaving a lasting legacy to your favorite charity.

If you would like to learn more

about year-end gifting, call: Michael Pellman, Retirement Planning Specialist, Morgan Stanley / Riverhead, 284-5213, michael.pellman@morganstanley.com.

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