Tax-Smart Strategies: Is Now the Right Time to Give a Financial Gift?

If you plan to give a gift of cash or securities to your heirs or a charitable cause, there may be strategic opportunities from a tax point of view. In this part of our series on tax-smart strategies, we will look at three scenarios that might make sense for you.

Not all gifts are treated equally when it comes to taxation. What you give and when you give it can have a material impact on the after-tax outcome for you and your family. Here are three potentially advantageous giving scenarios and some guidance on how you might take advantage of them.

Giving securities to heirs when the market is down

If you anticipate having a large taxable estate and some of your investment securities have recently declined in value, it might make sense to gift them to your heirs now instead of later.

True, you will end up triggering a taxable gift on any amount of gifted securities in excess of $17,000, but it may be preferable to use part of one’s lifetime estate exclusion amount to give these assets away while they are depressed in value, thus utilizing a smaller amount of the exemption to gift the same securities.¹

By giving away the securities now, the subsequent value recovery will occur in the hands of the recipient rather than within your taxable estate.

Giving cash or securities before tax rates go up

If you expect your estate to be worth much more than $5 million, there may be another reason to consider gifting cash or securities sooner rather than later. That’s because the lifetime exemption for estate tax is $12.92 million for 2023, thanks to the 2017 Tax Cuts and Jobs Act.² But, starting in 2026, it is expected to return to the pre-2018 level of $5 million, adjusted forward for inflation.³

Making large gifts now, with the higher estate exclusion amount, could go a long way in preserving family wealth. Making the same gift in 2026 or later, when the lifetime exclusion amount drops back to the old levels, could come with a hefty gift tax.

Giving to charity when you must make an IRA withdrawal

If you own an IRA and are subject to a Required Minimum Distribution (RMD) that you don’t actually need to fund your lifestyle, you might consider using a Qualified Charitable Distribution (QCD) to make a gift to charity directly from your IRA account. This may allow you to side-step some or all of the income tax you might have otherwise paid.

Normally, distributions from IRAs are taxable income, but a properly executed QCD allows that income to be excluded from taxation, which can lower taxable income on other sources of income too. This might provide tax relief on qualified dividends and capital gains and keep you in a lower bracket for things like Medicare premiums.⁴

Keep in mind that QCDs are limited to $100,000 per year per person. You must be age 70 ½ at the time of the distribution (not merely turning 70 ½ later that year).⁵ And it’s important that the payment go directly from your IRA to the charity without you touching the funds.

If your plans around gifting cash or securities to your heirs or to charitable causes are not yet in sharp focus, you might consider speaking with your wealth advisor about how changing market conditions and tax rules might impact your strategy. A bit of planning and the right advice could make a meaningful impact on your family’s wealth over generations.

¹ https://www.investopedia.com/terms/g/gifted-stock.asp
² https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
³ https://www.irs.gov/newsroom/estate-and-gift-tax-faqs
⁴ https://www.irs.gov/newsroom/reminder-to-ira-owners-age-70-and-a-half-or-over-qualified-charitable-distributions-are-great-options-for-making-tax-free-gifts-to-charity
⁵ https://www.forbes.com/sites/juliejason/2022/02/07/new-rules-may-limit-taxpayers--max-qcds-from-iras

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