Gifting Money: How to Create a Tax Savvy Plan for Larger Sums

Bridget Handke, CFP®, CAP®
Aug 15, 2018 12:53:29 PM

gifting moneyThey say it's better to give than to receive. When it comes to gifting money, you likely want to make sure your assets go to the people and causes you love, not Uncle Sam. Whether you're estate planning or just looking to spread some goodwill, here are some strategies for creating a tax-savvy gifting plan. Note that most of these gifting strategies are irrevocable.

Gifting Money  

Gifting money can mean a variety of things. For example:

  • Giving your children money towards a down payment on their first house as a gift.
  • Responding to a Go Fund Me request to help a neighbor with medical bills.
  • Helping your grandchild pay for college.
  • Contributing to a church building fund.  
  • Planning to leave a large sum of money for your alma mater to fund a university project at the end of your life.  

You may be wondering how all these gifts fit in with income or estate taxes?  Let’s take a look at these one by one.

Giving money directly to a person – the Annual Gift Exclusion

Let’s say your daughter and her spouse have been diligently saving for a down payment on their first home. They have saved a significant amount of money, but to put a 20 percent down payment they will need more. You want to reward their diligence and help them out. You can give any one person $15,000 (in 2018) as your annual gift exclusion without either of you paying any tax. If you are married you can each give $15,000 – or $30,000 to any one person in a year. In fact, you can give $15,000 to an unlimited amount of people without paying tax or filing any kind of IRS forms. So in this example, if you are married, the two of you could each give $15,000 to your daughter and also her spouse for a total of $60,000 in 2018 without anyone paying tax or filing a form. The Annual Gift Exclusion amount can change from year to year.

download our resourcesGiving more than the Annual Gift Exclusion in one year

Let’s use the same example as above but you are single, and your unmarried son is buying a home. You want to give him $60,000 towards his down payment, which is more than the $15,000 Annual Gift Tax Exclusion. If you can go ahead and give him the $60,000, neither of you will owe income tax. However, you will need to file a Gift Tax Return to alert the IRS of your $45,000 gift ($60,000 less the allowed $15,000). This amount will be added to your estate when you pass away. The 2018 estate tax exclusion is $11,200,000 per person. So if the $60,000 you give this year doesn’t put you over the estate tax exclusion amount that is current at your death, then no estate taxes will need to be paid. (If you have already given away more than $11,200,000 then you would owe transfer tax).

Contributing to a Medical Go Fund Me

You’ve learned that a neighbor’s child has a chronic illness that is costing the family thousands of dollars each year in deductible and out of pocket expenses. They have set up a Go Fund Me account. These are typically not IRS approved 501(c)(3) charitable organizations so your gift will not be tax deductible. However, the Annual Gift Exclusion still applies and you can give up to $15,000 in one year to a person without tax consequences. What if your heart really responds to someone’s medical situation and you want to give more than $15,000?  Instead of contributing to the Go Fund Me, you could pay someone’s medical bills directly. In fact, you can pay an unlimited amount of medical bills for one person without having to pay tax.

Helping your grandchild with tuition

There are a few ways you can help your grandchildren with their college tuition. For example, your grandchild Sasha is in first grade. You could put money into a College 529 Savings Plan.  This is an account you own, and it will grow tax free. Assuming you use it for qualified tuition expenses, you can withdraw funds tax free as well. If Sasha decides to take a gap year right out of high school, you are not required to release any funds as you own the funds, not her.  You can contribute up to five years worth of the Annual Gift Exclusion amount at any one time into a College 529 Savings Plan. In 2018 the Annual Gift Exclusion amount is $15,000 so you could contribute $75,000 all at once, but you would have to wait 5 years before contributing again.

Alternatively your grandson Leo is a high school senior, and you just don’t have time to contribute to a 529 plan and let the funds grow. You could give Leo the Annual Gift Exclusion amount. You would be limited to $15,000 in one year (without having to file gift tax forms). Or you could simply pay his tuition directly. You can pay an unlimited amount of tuition in any year without having to file a gift tax form.

Word of caution, these gifts can offset the amount of aid a child could receive. Please consult your financial advisor before moving forward.

A word about the new tax law:  Tax Cuts and Jobs Act of 2017

Before we move into gifting to your favorite charities, we need to address the new tax law.  Among other things, the standard deduction for married couples has changed to $24,000 and for single filers is $12,000. In addition, each state has different deduction amounts. For example, the Minnesota state tax deduction for income and property tax is capped at $10,000, and miscellaneous deductions have been eliminated. These changes will have many more people taking the standard deduction rather than itemizing deductions. If that is you, your gifts to charity will not have the tax reducing impact that you may have experienced in the past.  

Use your Individual Retirement Account (IRA) to send your RMD to charity

Once a person turns 70 ½ they must take Required Minimum Distributions (RMD) out of their IRAs. The tax law allows you to send gifts to a charity directly from your IRA. It will count toward your RMD, but it will not show up as income on your tax return. Since many people will be using the standard deduction instead of itemizing, it may be better to simply reduce your income by not having RMD to charity show up on your tax return, than to use other assets.  

Name charities as IRA beneficiaries

Another way to leverage your IRA is to name the charity as a beneficiary. Suppose you have an IRA worth $1,000,000 and an individual account worth $1,000,000, and you want to leave half of your wealth to your favorite charity and half to your children. If you leave the IRA to your children, they would have to pay income tax when they take IRA distributions. So the value of that gift from you may be only 50-80% of the total.  However, if you leave the individual account to your children, in most cases they would receive full value of that $1,000,000 without having to pay income tax. If you leave the IRA to your charity, they will not pay tax on the $1,000,000 and would receive the full benefit. So for everyone to receive full benefit of your hard earned wealth, it may be beneficial to leave the IRA (or portions) to charity and leave your kids the individual account.

Stack Charitable Donations

If your charitable gifts will not reduce your taxes because you will be taking the standard deduction, then consider stacking your charitable gifts all in one year. For example, if you normally give $10,000 per year, you could stack your gifts by giving $30,000 in year one and nothing in years two and three. This allows you to use itemized deductions in year one and receive a tax reducing benefit on your charitable contributions for amounts over the standard deduction. The following two years, you will simply use the standard deduction.

Use a Donor Advised Fund

One of the problems with the above scenario is that your favorite charities will receive more income from you in one year and nothing in the following years. It could be tough on their budgets. So instead of giving to the charities directly you could give to a Donor Advised Fund (DAF). A DAF is a public charity that allows donors to make a charitable contribution into a fund set up in their name. Once you give to a DAF, that is your potentially taxable deductible gift and it is irrevocable. It is no longer your money. However, you are the grantor of the account and whenever you are ready you can grant to your favorite charities.  So if you are using the stacking technique, you could give $30,000 in year one and grant $10,000 over each of the next three years to your favorite charities. You will have a $30,000 tax deduction in one year and your charities will receive $10,000 per year and will have a better time with their budgets. There are many different types of DAFs including those associated with your brokerage firm, to community-based.

Leverage your Tax Benefit and Give Appreciated Assets

Whether giving directly to a charity or to a DAF, one way to get a bigger tax benefit is to give appreciated assets instead of cash, for example an investment that you own that has done well. Let’s say you want to give money to a charity. You could give cash or an appreciated asset. If you give cash, there is no additional tax benefit. If you have an appreciated asset and you sell it to have cash to give to a charity, you will pay a capital gains tax on the gain. However, if you give the appreciated asset directly to the charity or DAF, you will receive the potential tax deduction benefit of the full gift and avoid paying a capital gains tax. The charity will take your appreciated asset and sell it on their side. Since they are a charity they will not pay tax on the gain in the asset. You both win.  

A couple of additional benefits of gifting appreciated assets to a DAF are the following:  

  • When stacking gifts as described above, appreciated assets could be easier on your cash flow than if you decide to give three years of gifting from your income.
  • If you gift to small or unsophisticated charities they may be unfamiliar with how to receive appreciated assets and it could cause a problem. Instead if you give to the DAF then grant to your small charity, the DAF will send cash to your charity.

Advanced Estate Planning Tools

There are other more advanced estate planning tools that could allow you to receive either income or estate tax deductions. These irrevocable tools require more thought and caution so it is recommended that you consult your financial, tax and estate planning advisors before implementing.

Bargain Sale

The situation is you have a cabin up north you no longer need. Your favorite non-profit is doing a capital campaign. You could sell them your property at less than the fair market value of the property. It is treated as part sale, part gift. You may receive an income tax deduction for the portion that is considered a gift.

Life Insurance

What if you have a life insurance policy that you have been paying into for years? Your financial planning has also gone as planned to the point where you no longer need the life insurance. You could gift the Life insurance to charity, and by doing so you may be able to leverage your gift into something bigger than you could normally give. There are a number of ways to do this:  

  1. The donor designates the charity as the beneficiary. The charity will receive the funds when the donor dies. There is no tax deduction for this method.
  2. The donor could make the charity the owner and beneficiary and gift the cost of the premium to the charity each year. The premium gifts may be tax deductible. The policy generally needs to be substantial as the charity has expenses in administration.
  3. You can gift a policy with cash value to a charity, and they could simply cash it in. A gift of insurance with cash value is currently deductible up to the lesser of cash value, or the premiums paid less loans.

If you have Required Minimum Distributions (RMD) from your Individual Retirement Account (IRA) that you don’t need, you could consider leveraging these RMDS to a much bigger gift to charity. You could take out a life insurance policy and make the premium payment with your RMD. The policy death benefit will be bigger than your collective RMDs and your charity will receive a large payout at your death. Using your RMD as a premium payment on a life insurance policy will not have an immediate tax benefit like it would when sending directly to the charity.

Retained Life Estate

For many, their largest asset is their home. Perhaps your favorite charity has requested a large gift from you which you would love to give, but your assets are limited. You might consider giving a Retained Life Estate of your home. A donor irrevocably deeds their home or farm to a charity but retains the right to live in it for the rest of their life or a term of years (or both).  The donor receives an income tax deduction for the charity’s remainder value (based on a specific formula). There are some important ramifications and potential unintended consequences so you would only want to do use this tool after thorough research and consultation with your financial, tax and estate planning advisors before implementing.

Gift Annuity

Suppose you would like to give a large gift to your favorite University and you are also concerned about having consistent cash flow to fund your lifestyle. You could consider a gift annuity. You would give cash or assets to the University and the University would provide you with an income stream for life or a specific term. This is a split interest gift. The tax deduction is for the present value of the remainder gift (based on a specific formula).  

Charitable Remainder Trust

This is similar to the gift annuity above and is generally used with bigger dollars than a gift annuity. This is an arrangement in which you would transfer assets to a trust. You will receive an income tax deduction for the remainder interest. You receive income from the trust for the trust term, which could be for life. You may receive a more favorable tax treatment on the trust income than if the assets were outside of the trust.  At the end of the trust term the charity receives the assets.

Charitable Lead Trusts

This type of trust is the exact opposite of the Charitable Remainder Trust. Suppose you have a large asset and a big estate. You would like to benefit a charity as well as your children, but you are concerned about your children inheriting a lot of money before they have found their direction in life. This tool will allow you to give the income from the large asset to charity for a term of years. At the end of the term it will revert to your children. These trusts can be structured a number of ways. In general, this trust is used to remove assets from a person’s estate and is an estate tax reduction technique instead of as a way to receive an income tax deduction. In some circumstances, this trust can be structured to also reduce income taxes.  Usually this irrevocable tool is used in conjunction with other estate planning tools and requires the expertise of an experience estate planning attorney.

Private Foundations

Suppose you have done very well over the years and would like to share your wealth with a variety of charities. You have a vision and would like to be very involved in the distribution of your gifts to charity. If this is you, you might consider setting up a Private Foundation. They can be excellent vehicles to pass on legacy values to heirs. Private foundations must distribute 5% of the balance to 501(c)(3) organizations each year. Even though they are private, the information about the foundation such as its investment and grant history is considered public. There are significant costs and many rules to follow in maintaining a private foundation. You would want to consult your financial advisor and an experienced estate planning attorney to set up an irrevocable private foundation.

If you have Millions or Billions

In 2018, the tax laws changed so that each person can leave an estate worth $11,200,000 without paying federal estate tax. Couples can leave $22,400,000. What if your wealth far exceeds these amounts? If this is you then your best strategy would be consulting your financial and tax advisors as well as experienced estate planning attorney to create a comprehensive estate plan. Depending on your goals and values, the attorney can help you gift more of your money using a variety of tools. Supporting the people and causes that you love is a wonderful way to leave a lasting legacy.  


Gifting Money can be a gift to an individual or a contribution to a charity. It can have a tax reducing impact or not. Giving can be a wonderful way to share with other people, live your values, share your wealth, and leave a legacy. While some ways of giving may help us avoid some taxes, some giving strategies have tax deduction limitations, some have special rules, and others may potentially have unintended consequences. Because of these parameters, we encourage you to consult your financial, tax and estate planning advisors before taking any giving action.

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