If you have accumulated a significant net worth over your lifetime, but you are unlikely to spend it all, you may want to consider some form of gifting.
You may also benefit through the form of federal tax deductions, capital gains avoidance, and reduced inheritance taxes. This is not intended to be a comprehensive list, but it is proof that not all gifting or estate reduction strategies are complicated.
- Cash – Perhaps the most often practiced method. You can simply give cash or write a check to your favorite person or grandchild. In 2012, you can gift up to $13,000 (called the annual exclusion) to an unlimited number of individuals without reporting or tax requirements. In fact, if you are married, you can take advantage of gift splitting which allows for you and your spouse to gift up to $26,000 to any individual. Gift splitting does require filing IRS Form 709 for reporting purposes, but the gift remains tax-free to all parties.
- Roth IRA – Have you considered giving money to your kids or grandkids, but were concerned they would spend it right away? If they are working and otherwise qualify, you could put up to $5,000 a year ($6,000 if age 50) into a Roth IRA for them. Another clever approach is to offer matching contributions; you put in a dollar for every dollar they stash away.
- Donor Advised Fund – Most major mutual fund companies now offer some version of this type of account. You simply make a gift to an account (usually $10,000 or more minimum) that should qualify for an immediate tax deduction. The funds are invested and as often as you want, you can further instruct that money in the fund to be distributed to the charities of your choice.
By involving your kids or grandkids in the process of giving, these methods can also be a great way to encourage philanthropy in future generations.