Tom Orecchio, CFA, CFP, ChFC, CLU, AIF
Tom Orecchio, CFA, CFP, ChFC, CLU, AIF
Tom Orecchio examines the principles of wealth management and financial planning-from portfolio and tax management to alternative investments and estate planning-to help physicians achieve financial success.

Gifting Strategies

The holiday season is in full swing. And although the ups and downs of the market may make you feel more like Scrooge than Santa, your long-term financial objectives may still include plans to gift and transfer your wealth. A carefully planned gifting program can help you achieve personal aspirations, such as leaving a legacy through charitable contributions or assisting loved ones. But importantly, it also reduces one’s estate and thus minimizes the estate taxes that your heirs may have to pay upon your death.

For both 2011 and 2012, an individual may gift $13,000 annually per person without having to file a federal gift tax return with the IRS (Form 709). If, for example, you had three adult children to whom you would like to gift and were to take full advantage of the annual gift exclusion, you would be able to remove $39,000 out of your estate in one year ($13,000 x 3). For married couples filing jointly, this amount would increase to $78,000 ($13,000 x 3 children x 2 (husband and wife)), a significant reduction of one’s estate.

It’s important to keep in mind that exceeding the annual gift limit and filing Form 709 with the IRS does not necessarily mean that your estate will incur additional gift taxes upon your death. This is because the current lifetime gift tax exemption limit is $5 million. Although the lifetime gift tax exemption is set to revert back to $1 million in 2013, under the current law you would not incur any gift taxes upon your death unless your total gifts over your lifetime exceed $5 million.

Keep in mind that any payments made directly to a medical provider or educational institution on behalf of someone else are not considered taxable gifts and do not count toward the annual gift or lifetime exclusion. For example, tuition payments for grandchildren that are made directly to a college (rather than to the parents) would not be constrained by the $13,000 annual gift exclusion limit or be included in the lifetime exemption limit.

If one of your donees has a 529 Plan, contributions made directly to the plan do count toward the annual gift exclusion; however, you may “front-load” the gift for five years. That means that in one year, you may contribute five times the annual gift limit per donee to a 529 Plan, or a total of $65,000 in 2011 and 2012 (or $130,000 for a married couple filing jointly).

Although no additional annual gifts can be made to that donee for the following fiveyears after this is done, contributing a greater amount upfront allows you to take better advantage of the potential tax-deferred growth of the 529 plan as well as reducing your estate. The only caveat for the five-year election for 529 Plans is that you would have to file Form 709 for the year of the election, even though there is no taxable gift.

For charitable giving, consider making a Qualified Charitable Distribution (QCD) from your IRA. Any distributions up to $100,000 made from your IRA before Dec. 31, 2011 that go directly to a qualified charity will not be included for income for tax purposes, If you are over age 70-and-a-half, this may be a good way to use your Required Minimum Distribution. Or, consider setting up a donor-advised fund which is relatively convenient to establish through an investment firm, and would allow you to manage your charitable donations while removing those assets from your estate for federal gift tax purposes.

or charitable contributions that are more complex in nature, it may make sense to set up an irrevocable trust — such as a Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT) — that uses sophisticated methods allowing you to draw income from the trust for multiple beneficiaries. If this is the case, make sure you consider the administrative burden and high expenses that come with establishing and maintaining a trust and seek the advice of a qualified attorney.

Finally, if you are transferring assets rather than making cash gifts, make sure you consider the impact of cost basis. Unlike assets that are inherited at death, gifted assets do not receive a stepped-up basis but rather take on the cost basis of the donor.

Generally speaking, the advantages of minimizing estate taxes outweigh the loss of the stepped-up basis for your heirs since the estate tax rate is higher than the capital gains tax that would be incurred upon the sale of the assets.


Tom Orecchio is a principal and wealth manager with Modera Wealth Management, LLC (“Modera”). Nothing contained in this blog should be construed as personalized investment, financial planning or other advice, and there is no guarantee that the views and opinions expressed herein will come to pass. Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be construed as a solicitation to buy or sell any security or engage in any particular investment strategy.

Modera is an SEC registered investment adviser. For more information about Modera, including our registration status, fees and services, please refer to the Investment Adviser Public Disclosure Web site at or visit our website at or contact us at (201) 768-4600 to obtain a copy of our Disclosure Brochure.