Gifting Non-Financial Assets
As you age, it’s both natural and prudent to think about what should happen to your assets once you’re gone. Some assets, such as money, have a clear and universal value, while the value of other assets, such as a quilt passed down from previous generations, is largely personal. Then there’s a third, more complicated category of assets that combine quantifiable objective value with subjective worth, like the family vacation home on the lake, the Steinway grand piano in the parlor or the Georgia O’Keeffe painting that hangs above the fireplace.
Although you could provide for the distribution of all of your assets as part of your estate, there may be powerful incentives to give away certain assets during your life.
Suzanne Shier, wealth planning practice executive and chief tax strategist/tax counsel at Northern Trust, describes some of the key considerations involved in choosing to give away assets such as property and art.
Wealth: The first consideration in making a gift of this sort is whether the recipient is an individual or a charity. What are some of the tax implications in each case?
Shier: The first $14,000 worth of assets given outright to an individual qualifies for the gift tax annual exclusion, and so is gift tax free. Gifts in excess of the annual exclusion amount are typically subject to a federal gift tax paid by the donor, at a maximum rate of 40% in 2016.
(Every taxpayer is entitled to make tax-free gifts during life [not qualifying for the annual exclusion] or at death totaling a sum equal to the applicable exclusion amount. The applicable exclusion amount is subject to annual inflation adjustment and in 2016 is $5,450,000.)
Although gifts to qualified charities are not subject to gift tax, the benefit of the income tax charitable deduction depends on the identity of both the asset being donated and the type of charity receiving it. For instance, donating a rare musical instrument will not result in the same income tax deduction as a gift of cash or marketable securities of equivalent value (except under very limited circumstances).
In general, a donor can deduct the full value of a cash gift to a public charity up to 50% of his or her adjusted gross income (AGI), as compared to a corresponding deduction up to only 30% of AGI for donating assets such as works of art and other collectibles. Because of these and other limitations, tangible assets usually aren’t the best kinds of gifts to charity.
Even though no income tax deduction is associated with a gift to an individual, the donor may still enjoy income tax benefits by making such a gift. For example, if you make a gift of an income-producing asset to an individual in a lower tax bracket, the income generated will be the same, but the associated income tax liability will likely be smaller.
Wealth: Real estate gifts come with special considerations, especially if the gifted property might be sold down the road. How might a donor use a charitable remainder trust to lessen the tax burden?
Shier: Transferring appreciated assets – especially depreciated real estate – to a charitable remainder trust benefiting one’s heir, rather than directly to him or her, can make sense if there’s a desire to sell the gifted asset and simultaneously benefit charity. By transferring the appreciated asset to a charitable remainder trust prior to sale, the income tax liability of the sale can be deferred into periodic payments instead of being redirected by the donee in one lump sum. Note that an important element of this income tax deferral technique is that the sale of the asset was not arranged prior to the donor’s transfer to the trust.
Wealth: Beyond tax implications, what other financial considerations should factor into gifting tangible assets?
Shier: To establish the value of the assets you’re giving away, you’ll need to have them appraised and, in some cases, authenticated. The cost of these services can be sizable, although strong paperwork from the original purchase can be extremely helpful in simplifying the process and reducing costs.
Think through not only the cost of transferring the asset you’re planning to give away, but also the cost of ownership. For example, valuable, tangible personal property like a painting is often expensive to maintain and insure. Likewise, if you donate a vacation home to your children, you need to make sure they have the money to maintain the property, including the cost of repairs and property taxes. Careful consideration and planning before making the gift can avoid unintended consequences and unpleasant surprises for the recipients.
Since there are many options and considerations around distributing your wealth both during your life and upon your death, discuss your plans with your family and wealth management advisor to help ensure your wealth transfer goals are met.