Baby boomers are poised to set off the largest generational wealth transfer in history, with a combined estimated value of over $70 trillion. This has many individuals scrambling to not only preserve their wealth but minimize the tax impact on their beneficiaries. How to do this is the proverbial million-dollar question.
The question is even more pressing in light of the upcoming sunset of many 2017 Tax Cuts and Jobs Act (TCJA) provisions. The TCJA temporarily doubled the lifetime estate tax exemption amount, but after 2025, it will return to its previous level (albeit adjusted for inflation), somewhere in the $7 million range. The skyrocketing value of certain assets, such as real estate, could mean an improperly planned transfer of property will result in a hefty tax bill for the heirs, even for families that don’t consider themselves wealthy.
Taxpayers have many options for protecting assets and mitigating the tax impact. For the philanthropically inclined, a strategic charitable gift could be an easy, effective tactic. Today—exactly one month before Tax Day—let’s see how a well-planned donation can help boomers accomplish their planning goals.
Portfolio Rebalancing and Gifts of Appreciated Stock
Boomers who continue to gradually reduce their overall portfolio risk must regularly rebalance their assets. To reduce holdings of riskier stocks that have exceeded desired levels, investors can sell some of the stock—but they will end up paying a potentially hefty capital gains tax on the appreciation. A better option may be for the taxpayer to donate the stock directly to your organization. This tactic accomplishes several goals:
• Rebalances the portfolio to maintain a set risk level
• Bypasses all capital gains tax on the appreciation
• Qualifies for an income tax deduction for the full value of the stock (even though the appreciation was not taxed)
• Makes an important charitable impact
This tactic works with other appreciated assets as well, like land or real estate.
Estate Reduction and Tax Benefits with a Donor-Advised Fund
In light of the scheduled drastic reduction in the estate tax exemption amount, boomers may be looking to reduce the size of their estate. Or, if they have just sold a business or experienced some other influx of cash, they may be seeking a sizable income tax deduction. A donor-advised fund (DAF) can address both needs like this:
• The taxpayer makes an irrevocable distribution to the DAF.
• The assets remain in the fund, where they are outside of the estate and benefit from professional asset management.
• The donor qualifies for an immediate income tax deduction.
• When the time is right, the donor can advise or recommend grants from the DAF to chosen qualified charities.
Passing More Wealth with a Charitable Lead Trust
For boomers interested in reducing or even eliminating the taxes customarily due on the transfer of wealth to loved ones, a charitable lead trust (CLT) can be an effective way to accomplish that while also supporting your organization. A CLT makes income payments to charity, then passes the remainder to named beneficiaries (often adult children or other family members). By using a CLT, the donor can:
• Secure a deduction for gift and estate tax purposes for the charitable gift portion of the CLT.
• Realize tax savings on the appreciation (if any) of the assets while they’re in the trust.
• Pass more wealth to heirs (thanks to the tax savings).
• Make a significant charitable impact.
You can help boomer donors accomplish multiple planning goals by understanding their needs and educating them on the most effective giving options. Strategic charitable gifts can provide a win for taxpayers and for charities.
