Taking Advantage of Uncle Sam's Gift Provisions
GIFT-GIVING this holiday season can be not only jolly, but financially rewarding.
Or at least, giving money, investments, or even your home to charities or your children can be made less costly through provisions in the United States tax code.
''There are now all sorts of ways to set up trusts, or provide contributions, and make it advantageous for yourself too,'' says James Fraser, president of Fraser Management Associates, a financial consulting firm in Burlington, Vt.
As is well known, tax filers can always obtain a federal tax deduction by making charitable contributions to groups such as the Salvation Army, a church, or CARE. The only requirement is that you must have a receipt for donations valued at more than $250. But many people do not realize, Mr. Fraser says, that you can also make a gift of up to $10,000 to any person - a family member or just a friend. Doing so lowers the cumulative value of your estate, reducing what can be hefty estate-tax rates down the road.
''You will not be able to take a deduction on your tax form,'' Fraser says. ''But you will not have to pay a gift tax on the contribution. If you are married, you and your spouse can jointly give up to $20,000.''
To qualify for this year's taxes, you will have to ensure that the check clears the bank by Dec. 31.
Gift of stock
If you give a gift of stock, the person will have to pay a capital-gains tax when the stock is sold. The cost-basis will be the value of the stock when purchased by the donor. The donor should file a gift-tax return with his or her federal taxes.
What if you want to give a particularly large monetary gift to a charity or public service group, including a university? Most charities have a number of options. The Salvation Army, for example, offers charitable-gift annuities, pooled-income funds, charitable remainder trusts, and what are called unitrusts - all forms of irrevocable trusts.
One popular approach is to invest in a charitable pooled-income fund. The income funds, typically managed by the charity, are invested primarily in bonds.
You will receive income for the remainder of your life (and possibly even the life of your heirs, if you choose), based on your contribution and the yield of the fund. In recent years, yields have ranged from 5 to 9 percent annually for most charities. But the annual gain will fluctuate, depending on market interest rates. After your death, the principal in the fund reverts to the charity. To invest in the charitable pool, you must make an irrevocable donation of cash, securities, or property, valued at the minimum level of contribution set by the charity.
For most donors, there are three advantages for such gifts:
* You get an immediate tax write off. The charity will help you determine the specific amount.
* You reduce your estate tax, since after the donation the value of your estate is reduced by the amount of the gift.
* You avoid capital-gains taxes on donated securities or other property held longer than a year.
Most major charities in the US offer pooled funds. Groups include the American Red Cross, CARE, the Salvation Army, the YWCA, National Wildlife Federation, and even the Metropolitan Museum of Art. The minimum donation is usually around $5,000. The Salvation Army will help a contributor ''determine their specific tax benefit,'' says Colin Foster, an official of the Salvation Army in the New York area.
The main drawback to a charitable pooled trust is that you might want your money back if you become uncomfortable with the operations of the charity. Once given, an irrevocable contribution cannot be taken back. If that makes you uneasy, ''set up some type of revocable trust,'' Fraser says.
One alternative: Give through a charitable-trust mutual fund. Several fund families now offer gift trusts that provide income during your lifetime. Fidelity Investments Charitable Pooled Income Fund, a no-load fund, allows you to donate to 10 charities. Your list can be revised at any time. The initial donation must be at least $25,000. Subsequent donations can be $5,000 or more.
Gift of your house
Finally, if you are a homeowner, you may benefit by making a gift of your house. To do this, experts say, you should definitely consult an attorney and make certain that the charity is legitimate and that you have followed proper legal procedures. Do not rely on magazine or newspaper articles, including this one. Typically, your lawyer will draft a document stating that you and your spouse, if alive, will continue to live in your home. But upon your deaths, the home will pass to the designated charity. You will be able to take a hefty tax deduction for your gift now.
You can also reduce estate and future capital-gains taxes by giving the house to your children - presumably adult children - even while you continue to live in the house during the remainder of your lifetime. There are several variations, but the most popular one is called a ''life estate.''
Establishing a life estate is relatively simple and inexpensive, usually costing under $300. Again, be sure to consult a real-estate attorney.
Your lawyer or estate planner will draft a ''life estate trust document.'' In such an arrangement, the house, upon the death of the donor, passes along to the donor's designated heir. The cost basis of the home for tax purposes will be the value at the time of the owner's death, not the value at the time the owner originally bought it. That would mean a lower capital-gains tax, if required.