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Benefit of Life Giving

By Michael W. Mustico, CPA, J.D.

The selfless act of making a charitable gift, can often have even more positive benefits when using the right methods. The two biggest problems I see in my practice is: 1) using the wrong type of asset to make the gift; and 2) waiting until death before finalizing the gift. Too often, this only occurs because the person making the gift has not received the proper advice on which gifting strategies to choose from.

When dealing with the type of asset that should be used to make a gift, it is important to remember that there are hidden gems within the tax law. Typically, this has to do with appreciated assets and the fact that the gifting of such assets will result in the embedded gains avoiding income tax, while still allowing the donor to deduct the full fair market value of the gift from income taxes. This is most commonly associated with stocks or mutual funds, but people often forget is that real property can be used in the same manner, especially with the current boom in the real estate market. Individuals should look closely at which type of assets should be used to accomplish their charitable intent.

Finalizing lifetime gifts, rather than waiting until death, should also be something that individuals consider. If a donor desires to retain the income from the assets during his life, it is important to understand that there are methods to “finalize” gifts, while still retaining the income stream derived from the assets.

Two of the more common methods that allow the donor to retain an income stream from the gifted assets are the Charitable Remainder Trust and the Charitable Gift Annuity. They are both very similar in regard to how they work, as well as the benefits they provide. First, the donor generally decides how much income (s)he would like to retain and for how long (s)he would like to retain that income. Then the donor receives an income tax deduction for a portion of the fair market value of the gift. This income tax deduction can typically be used to offset some of the donors future income, from any income sources. In addition, the gifts will not be subject to estate taxes.

For those who wish to fully maximize the benefits, donors should consider combining these Trusts/Annuities with other strategies, such as utilizing appreciated property or performing Roth IRA conversions. There are many wonderful and exciting opportunities available for making lifetime gifts for those who are interested.

Michael W. Mustico, has practiced as a CPA and Attorney. He is the President of The Mustico Financial Group, Inc. and provides sophisticated financial and retirement planning strategies, as well as Investment Management.