I have co-authored this blog with Steven L. Friedman, Esq., a colleague of mine at Stark & Stark.

While holiday parties and shopping fill your schedule, consider setting aside time to evaluate year-end tax planning. This is the season for giving, and if giving does not factor into your current tax strategy, it could be an area for improvement. Developing charitable and intra-family giving strategies is an important component of any plan, and is particularly important at the end of the year. Charitable and intra-family giving can reap substantial rewards, but failing to properly consider your options each year may limit these benefits. The following analyzes some of the major end-of-year tax planning considerations for charitable and intra-family giving.

1) Have you used the $14,000 annual exclusion? The IRS allows you to give $14,000 per person, per year (“Annual Exclusion”). The Annual Exclusion is an important strategy if applied consistently over time, and should not be allowed to go to waste. You cannot roll the unused 2014 Annual Exclusion over to next year, so December 31st is the deadline for Annual Exclusion gifts.

  • Issues to Consider: The strength of gifting is also its greatest weakness. Gifting assets outright exposes the gifted property to the beneficiary and the beneficiary’s creditors. If the beneficiary has asset management issues and/or spending problems, the gift may be lost or squandered in a short period of time. To avoid this issue, consider a trust to hold the assets and properly applying them for your beneficiaries.

2) Are Discounts Available to Leverage your Gifts? Gifts to individuals in excess of $14,000 per person per year will use a portion of your unified Gift/Estate Tax Exemption. Trusts and minority discounts can enhance these credits and leverage the size of the gifts. For example, individuals owning a small business can create a trust and give minority interests in the business to the trust. Because the trust owns a minority stake in the business, the value of the interests owned by the trust may be discounted allowing the donor to leverage the amount of the gift and better utilize the applicable Gift Tax exclusions and exemptions. This strategy works with other assets, including, but not limited to, real estate and artwork.

3) Donating Appreciated Property to Charity. Donating appreciated property to charity is a common tax planning technique to avoid capital gains taxes while maximizing the tax deduction. However, it comes with rules and limitations, and failure to comply with these restrictions can have a profound impact on the tax benefits. These limitations include:

  • 20%/30%/50% Limitations. The IRS generally restricts deductions for gifts made to charities based to a percentage of the donor’s Adjusted Gross Income (“AGI”). There are 20%, 30% and 50% limitations that depend on several factors including the nature of the charity and the type of assets being donated. Due to these limitations, a donor may only be allowed to deduct the cost basis of appreciated property (as opposed to fair market value at the time of donation). Additional rules may apply such as the filing of Form 8283, appraisals and documentation from the charity. Due to these limitations, charitable donations should be closely evaluated by a tax professional.
  • Real Estate. Charitable donations of real estate must be substantiated by a qualified appraisal, and require the filing of Form 8283 with the IRS. Various restrictions apply to the substance and nature of the appraisal, and failing to comply with these restrictions could undermine the entire gift. For example, one donor made a charitable contribution of ownership interests in a Limited Liability Company that owned and managed real estate. To support the deduction the donor submitted appraisals of the real estate. The IRS denied the deduction because the appraisals failed to value the asset donated to the charity – the LLC ownership interests.
  • Tangible Personal Property. Unfavorable capital gains treatment may also result from appreciated tangible personal property (e.g. artwork, equipment, collections, etc.) If the property is put to an unrelated use, or is worth more than $5,000 and is sold by the charity in the year of donation, then the donor will only be able to deduct what the donor paid for the property, not the fair market value of the property at the time of transfer.

4) Trusts for Donated Property. Charitable Trusts can address some of the issues outlined in #3 above, depending on the type of trust you choose and the way it is implemented. Charitable trusts also afford enhanced access to income from the donated property over a period of years, giving you an added incentive to make the donation.

The preceding issues illustrate some, but not all, of the benefits and issues associated with charitable and intra-family gifting. If you have any questions on this, or other methods to increase the value of these gifts, please call the Trusts and Estate Department at (609) 895-7301 to schedule an appointment.