Welcome to our November Q&A about gifting and year-end and estate planning. As a business owner, you may want to utilize gifting shares and evaluate trust options as a part of your tax strategy. This action involves tough decisions about when, how and in what form to gift.  

Here are some commonly asked questions that we have gathered at Wilke & Associates.

Q:  What are the benefits of gifting stock to family, employees, and charities?

A:  There are three benefits of gifting stock:  1. You have given the proceeds to a cause or an individual important to you.  2. Capital gains taxes on the stock are avoided. The gift is fully deductible up to 30% of your adjusted gross income. 3. You are eligible to receive an income tax charitable deduction for the full fair-market-value of the stock at the time of the gift.

There are qualifications, of course. to take advantage of these special tax deductions.  The stock must have been held for at least one year. The stock certificate to be gifted must be postmarked by December 31, or your financial advisor can arrange the transaction from your account.

One caveat to be aware of —  high-income donors may be subject to a partial phase-out of itemized deductions. However, the excess may be carried forward and deducted over as many as five subsequent years.

• Generation-Skipping Trusts (GST) are effective in protecting the wealth you have toiled to earn.

Q:  What is a Generation-Skipping Trust?  

A: “Generation-skipping” is about skipping tax, not skipping your children or leaving them out of your estate plan. A spouse can be a beneficiary of a generation-skipping trust, as can children. With an estate tax rate of 40%, A GST is worth establishing for those who intend to leave assets to grandchildren and can help avoid tax liability for the grantor.  Once the grantor’s children die, the grantor’s grandchildren can withdraw from the trust.

Q:  Can you provide examples of GST benefits?  

A:  The future is uncertain and a GST can be a hedge of protection for the children of a grantor should they face financial misfortunes – such as divorce, a failed business, medical bills or financial debt. In the case of a divorce, the divorcing spouse does not have a privilege to any of the trust assets, since they were never theirs. Perhaps, the grantor’s child wants to start a company and the company is failing and is in debt, legally he or she will not be able to use the trust assets as surety.  Trusts that include real estate or securities intended for long-term appreciation, guard these investments against being impulsively sold. Stock dividends to be paid to the grantor’s children can be explicitly assigned as primary or supplementary income.

• Other year-end gifting approaches

Q:  How does an IRS Qualified Charitable Distribution (QCD) work?

A:  A taxpayer is allowed to give up to $100,000 to charity directly from their individual retirement account (IRA) once they are over 70 1/2 years old without counting the distribution as taxable income.

Usually a distribution from your IRA it is taxable. The withdrawal is included as taxable income and inflates adjusted gross income (AGI). However, if you give the same amount to your favorite charity, the gift reduces taxable income by the amount of the gift but won’t reduce your AGI.

This becomes an issue when dealing with itemized deduction phase-outs, exemption phase-outs, Roth contribution eligibility, the net investment income Medicare surtax, Medicare premium costs, the taxability of Social Security income, and some credit phase-outs which affect AGI.

Depending on the required minimum distribution (RMD) a QCD can be used to satisfy all or part of IRA distributions. This makes them particularly useful for currently employed senior citizens, large pensions, or, the individual ends up in a higher tax bracket.

Q:  Is it better to gift appreciated stocks or cash?

A:  It depends… If you are concerned about estate tax planning.  You can give as many family members as you like up to $15,000 per year ($30,000 from a married couple electing to split gifts) each without reporting it to the IRS.

If you are looking to offset capital gains tax, evaluating the options in gifting stocks may be a better option