As the fourth quarter of the year approaches, it is time to turn our thoughts to gifts, both personal and charitable. We also need to consider whether (and how) to make gifts both during lifetime and after death.
For gifts made to individuals, the annual exclusion limit for 2019 is $15,000 per person. For married couples, they can agree to “gift split” so the resulting gift to each recipient can be doubled to $30,000. If the recipient of the gift is married, the donor of the gift can also make a gift to the recipient’s spouse, and with gift splitting, that gift from one couple to another can be as much as $60,000 without incurring any gift taxes.
As the law stands today, individuals can transfer up to $11.4MM in combined lifetime gifts and transfers of wealth at death. The law is set to expire at the end of 2025. If nothing is done to extend the law, the limit will revert to its 2017 level, and be adjusted for inflation, bringing the limit to a number around $5.5MM per person.
There are some transfers that are not considered to be gifts for tax purposes that may be of large benefit to families. A grandparent can pay a grandchild’s tuition, as long as it is only for tuition and is paid directly to the institution, and it is not considered a gift. As long as the school meets certain legal requirements, the gifted tuition can be for grade school, high school, or college.
Similarly, an individual can pay another person’s medical expenses and it is not considered a gift. Just as with education, the payment has to be made directly to the institution. And the payment need not be for existing bills. One can pay for another’s medical insurance and it will not be considered a gift for tax purposes.
The result could be that a person provides educational expenses and pays for the medical insurance of a grandchild, they can also gift that grandchild $15,000 in 2019 without incurring any gift tax.
Individuals making charitable gifts and seeking to deduct the gift on the annual income tax 1040 return should be aware of increased limits to the standard deduction that have an impact on itemizing deductions. The standard deduction was increased in 2017. For a Single person or Married Filing Separately, the standard deduction was increased to $12,000. For Head of Household, the increase was to $18,000 and for Married Filing Jointly, the increase was to $24,000. Many individuals, of course, make gifts to charity for purposes other than the tax deduction, but it is important not to lose sight of the tax rules and benefits.
Gifts to charity are common in estate plans, as individuals look to remember those charities whose missions are important to them, either with a current gift or bequest in their estate plans.
These sorts of gifts do need to be revisited with some frequency. For some charities, the focus of their mission may change over time. The individual’s support of the particular mission may have waned or been superseded by a different organization. And, in some cases, the organization may no longer exist. If that happens, it may result in court action to determine which was more important to the individual: the mission, the deliverer of the service, or simply the charitable deduction.
A growing number of individuals are turning to Donor Advised Funds (DAF) for their lifetime and testamentary gifts to charity. DAF’s can generally be funded with as little as $10,000. A DAF is not required to make annual distributions. This is helpful for an individual who wants to make gifts while still employed and with a healthy income stream. This allows the fund to grow with contributions and (hopefully) market increases until the individual has retired and wants to focus on the fund making distributions. It should be noted there was a proposal to add a requirement for distributions in an early version of the 2017 tax reform, but it did not make it to the final draft. It is conceivable it may resurface in subsequent tax law changes.
There are some restrictions on what an individual establishing a DAF can do. The individual cannot give to a DAF and then, for example, have the DAF “buy” the individual a table at a charitable event. Additionally, while a DAF can give to a scholarship fund, it cannot be made to a specific recipient (for example, the individual’s family member).
Lastly, an individual can use her/his IRA to make a Qualified Charitable Distribution. Currently, this can only be done with an IRA, not company plans. The individual must be at least 70 ½. The gift can be up to $100,000 per person and can satisfy RMD requirements. It cannot, however, be made to a DAF or other private charitable foundation.