The IRS views the tax treatment of gifts of cash or property made to individuals and to charities very differently. Please consult your advisor at Aurora before considering gifting assets. Your gifting strategies should be part of your larger financial plan.

Currently, there is no gift tax liability on gifts of cash or property of $14,000 or less and no limit to the number of $14,000 gifts a person can make to different individuals in a year. Depending upon your situation, it may be preferable to gift cash or to gift property, as the original cost basis is transferred with the gift. For example, if you gift $14,000 of IBM stock with a cost basis of $1,000. The recipients cost basis is also $1,000, so the liability for the capital gain tax is transferred with the gift.

One way to increase your gifting to an individual can be to pay for his/her medical or tuition expenses; if those expenses are paid directly to the institution on behalf of another person, there is no gifting limit. In theory, a grand parent could pay the entire Harvard tuition for her grand daughter (a gift of over $250,000) and pay no state or federal gift tax.

Education plans are another way to fund an individual’s tuition expenses. 529 plans, for example, refer to the IRS tax code section that created them. These plans allow funds to be set aside and invested to grow with no future tax liability for the benefit of children; however, these funds must be spent on post-education education expenses only.

Charitable giving is somewhat different from gifting to an individual. The Federal Tax Code encourages making gifts to qualified charities (501(c) 3 registered charity). Gifts of cash are fine, but gifts of highly appreciated assets are frequently preferable because the donor receives a deduction for the fair market value of the gift and pays no capital gains tax on the donated gift.

There are also many gifting techniques for those with charitable intentions that can provide a steady income stream to the donor throughout his/her lifetime while benefiting the charity at the donor’s death that allow asset diversification and avoid capital gain and estate taxes.

Again, your gifting strategies and goals should be part of your broader financial plan. Contact your advisor at Aurora for more information on how these and other options fit with your plans.