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As the year comes to a close, many of us reflect on what we’ve accomplished and how we can make a positive impact on the people and causes that matter most to us. Whether it’s supporting a favorite charity, helping a family member save for education, or securing a child’s financial future, year-end gifting offers a unique opportunity to do so. Here are some thoughtful and tax-efficient strategies to consider as you plan your year-end gifts.
Charitable Giving: Supporting Causes Close to Your Heart
Charitable giving is a powerful way to support the causes you care about while also potentially receiving tax benefits. Here are a few strategies to make the most of your charitable contributions:
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- Donate Appreciated Assets: Instead of writing a check, consider donating appreciated stocks, bonds, or mutual funds to a charity. By doing so, you can avoid paying capital gains tax on the appreciation and may be able to deduct the full market value of the asset on your taxes. You may wish to explore a gift of highly appreciated securities. Selling securities can lead to a taxable event. As an alternative, you or a financial professional can write a letter of instruction to a bank or brokerage, which can facilitate authorizing a transfer of shares to a charity.
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- Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can make a qualified charitable distribution directly from your IRA to a qualified charity. This allows you to satisfy your required minimum distribution (RMD) while excluding the distribution from your taxable income.
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- Donor-Advised Funds: If you’re unsure which charities you want to support or want to involve your family in charitable giving, consider establishing a donor-advised fund. This allows you to make a tax-deductible donation now and recommend grants to charities over time.
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- Charitable Gift Annuities: A charitable gift annuity allows you to make a significant gift to a charity while receiving a stream of income for life. Part of the gift may be tax-deductible, and a portion of the annuity payments may be tax-free.
Gifts to Educational Savings Accounts: Investing in a Child’s Future
One of the most meaningful gifts you can give a child or grandchild is the gift of education. Contributing to an educational savings account not only helps secure their future but can also offer tax benefits. Here are some options:
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- 529 College Savings Plans: Contributions to a 529 plan grow tax-free and can be withdrawn tax-free when used for qualified education expenses, including tuition, fees, books, and even K-12 education in some cases. Many states also offer tax deductions or credits for contributions to a 529 plan. As a year-end strategy, consider “front-loading” a 529 plan by making a large contribution up to five years’ worth of the annual gift tax exclusion ($17,000 per year per donor in 2023).
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- Coverdell Education Savings Accounts (ESAs): Like a 529 plan, contributions to a Coverdell ESA grow tax-free and can be withdrawn tax-free for qualified education expenses. However, the contribution limit is $2,000 per year, and the funds must be used by the beneficiary before they turn 30.
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- Custodial Accounts (UGMA/UTMA): While not specifically for education, custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow you to transfer assets to a minor, which can be used for education expenses. Keep in mind that once the child reaches the age of majority, they gain full control of the account.
Whole Life Insurance for a Young Child: A Gift with Lifelong Benefits
While it may not be the first thing that comes to mind when thinking about gifts for a child, whole life insurance can be a powerful tool for securing their financial future. Here’s why:
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- Guaranteed Insurability: By purchasing a whole life insurance policy for a young child, you lock in their insurability at a young age. This means that they will have insurance coverage regardless of any future health issues.
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- Cash Value Growth: Whole life insurance policies accumulate cash value over time, which grows on a tax-deferred basis. This cash value can be accessed later in life for various needs, such as education expenses, buying a home, or supplementing retirement income.
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- Legacy Building: A whole life insurance policy can also serve as a financial legacy. By gifting this policy, you’re providing a long-term financial asset that the child can use or pass on to future generations.
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- Affordable Premiums: Since premiums are based on the insured’s age, purchasing whole life insurance for a child can be very affordable. The earlier the policy is purchased, the lower the premium will be for the duration of the policy.
Combining Strategies: Maximize the Impact of Your Year-End Giving
For those who are in a position to do so, combining these strategies can maximize the impact of your year-end giving:
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- Pair Charitable Giving with Educational Gifts: Make a donation to a charity in your family’s name while also contributing to a 529 plan or purchasing a whole life insurance policy for a grandchild. This way, you’re supporting both your community and your family’s future.
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- Plan for Tax Efficiency: Consult with a financial advisor or tax professional to ensure that your gifts are structured in the most tax-efficient way. For example, making charitable donations from appreciated assets or using the annual gift tax exclusion to fund a 529 plan.
Thoughtful Gifting with Long-Term Benefits
Year-end gifting is an opportunity to reflect on what matters most and make meaningful contributions to both charities and family members. Whether you’re donating to a favorite cause, investing in a child’s education, or securing a young person’s financial future with life insurance, these strategies not only provide immediate benefits but also create a lasting impact.
As your financial advisor, I’m here to help you navigate the complexities of year-end gifting and ensure that your generosity is aligned with your overall financial goals. If you have any questions or need assistance in implementing these strategies, don’t hesitate to reach out. Together, we can make this year-end truly special for you and those you care about.
**The content is developed from sources believed to be providing accurate information.
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