Giving with New Purpose: Mastering the Four Financial Gift Strategies

We are officially in the swing of gift-giving season! Mastering financial gift strategies is a blend of art and science. You can strategically impact someone’s life from your wealth through a financial gift. There are many ways to share your generosity: through acts of sharing wisdom, through financial services, monetary gifts, and charitable legacy gifts. The right gift for you and your intended recipient depends on the impact you intend to make, the budget, the tax impact, and the recipient’s stage of life. Giving a financial gift is a thoughtful and impactful gesture, regardless of your selected gift type. 

Gifts of financial wisdom 

Financial wisdom is the least exciting gift yet most beneficial for the youngest recipients. Clients often lament that their children need to be taught basic financial literacy in school. Financial literacy is becoming part of the core curriculum in some places, but certainly not all. One of the financial gift strategies that you can get the biggest bang for your buck focuses on developing financial literacy. Teaching children and even adult children the basics of personal finances can dramatically change their lives by arming them with the skills to make wise financial decisions. 

Walking them through opening a checking and savings account with the gift of initial funding is a practical gift. To take it one step further, you could use the checking and savings accounts to teach budgeting, managing expenses, and tracking cash flow. 

Financial books are another practical gift. You must be careful in selecting; some financial books fall into the junk category. We are partial to any of the books authored by Mr. Bogle, and one of the classics, Rich Dad Poor Dad, shares some timeless lessons. 

Gifts of Financial Service 

Time with a financial advisor is one practical gift that can be iffy. You must set expectations with the financial advisor and the recipient that it is a learning session, not a prospective client conversation. If expectations are set, it could be an enjoyable use of time for both and leave a good impression on your intended gift recipient. An excellent way to ensure this is time well spent is to ask the advisor to schedule the conversation during a slower season and to cover a few specific topics. You will likely have to compensate the advisor for their time based on their hourly rate. 

Monetary Gifts for Education

You have heard this from us before, but 529 accounts are wonderful vehicles for education savings gifts. 529 accounts are accounts that you can open at any major financial institution to save for education-related costs. You can open an account before the child is even born; you eventually will move the account to the child once they have a Social Security number. Most major institutions make it easy for anyone to contribute to a 529 account. You can forward an email with a specific link to those who want to give or even let them scan a QR code. There are limits on how much you can gift to a 529 without running into the gift tax exclusion. To avoid the gift tax exclusion, as of 2024, you can give up to $18,000 ($36,000 for a couple) per year.

Taking a longer look at the impact of your gift, 529 Plans are as much for estate planning purposes as education. They can last indefinitely and be used for education or passed on. Of course, there is the possibility that your heirs don’t use it for educational purposes. The penalty for not using it for education might be enough to nudge them to be prudent with these funds.

A provision within Secure Act 2.0 makes 529 contributions even more interesting. The provision allows individuals to transfer funds from a 529 college savings plan to a Roth IRA. It’s important to note that this provision has limitations. If you overfund a 529, or the child does not use the 529 funds for any reason, you can move those funds to a Roth IRA. The provision limitations state that the 529 has to be open for at least 15 years, and the maximum amount that can be moved per beneficiary is $35,000. The new provision eliminates any worry about leftover funds in a 529 because now you can boost the beneficiary’s retirement savings early in life. 

Monetary Gifts to Create Future Wealth

Giving someone a headstart on building their wealth can take many forms. The least complicated way is to save in a brokerage, a non-taxable account in their name. You have no limits on how much you can save in this time of account, and there are no limits on how the account owner can use the funds. The flexibility can be an advantage or disadvantage based on the situation. You need to remember the gift tax limits, as mentioned in reference to the 529 gifts, to avoid the gift tax exclusion; as of 2024, you can gift up to $18,000 ($36,000 for a couple) per year. If you want to gift above that amount, you certainly may; you must complete an additional form with your taxes to report the amount. You will not be taxed on the gift amount; it will be counted towards your lifetime exemption amount. In 2024, you can give away up to $13.61 million in your lifetime before running into any gift tax. 

Another way to make an impact is to contribute to a young person’s IRA. Saving to a Roth IRA is particularly impactful for young people. Building a tax-free bucket early in life allows for a long runway for those funds to grow and compound with additional contributions. A person can only have contributions in an IRA in their name if they have earned income, meaning they have earnings they report on a tax return. The max you can contribute to a Roth IRA is $7,000 in 2024. The gift recipient should wait until retirement to access the funds, but some loopholes exist. A person can access their contributions at any time without penalty, but that defeats the purpose of the retirement savings aspect of the account. 

Gifting highly appreciated securities is not a new idea. Instead of giving cash outright, gift highly appreciated securities from your taxable account. Assuming you are in a higher tax bracket than the recipient, the gift allows you to avoid the tax you would incur on selling those highly appreciated shares. By gifting the shares to someone in a lower tax bracket, i.e., a child or young adult just starting their career, they can sell the shares and incur a lower tax consequence. The tax consequence would be avoided altogether by gifting highly appreciated shares to a tax-exempt charity to get even more of an impact.

Gifts to Create a Charitable Legacy 

Lastly, those in their required minimum distribution years can create a charitable legacy through qualified charitable distributions. Qualified charitable distributions (QCDs) are a unique and tax-savvy way to make charitable contributions, but only for those subject to RMDs. Essentially, a QCD allows you to donate directly from your IRA to eligible charities without counting the distributed amount as taxable income. This means the donated funds benefit the chosen charity while satisfying the RMD obligation. QCDs are a classic example of the blend of the art and science of financial gift strategies. The science is in satisfying your RMD through a QCD you can strategically lower your taxable income, with the art being in the impact you make with those funds through your thoughtful charitable selection.  

Financial gift-giving can benefit both parties, the giver and the recipient. The intention, the consequence, and the budget all play a role in your selection of how you make your gift. In the financial planning process, make your financial gift-giving intentions known; your advisor may counsel you on even more options to consider. 

If you know someone who could benefit from reading about financial gift strategies, please share this blog with them.