Courtesy of: Juan Ocanas, Financial Advisor at Morgan Stanley
IF YOU’RE INCLINED TO HELP OTHERS, CONSIDER THESE TAX-EFFICIENT WAYS TO MAKE YOUR GIVING GO FURTHER.
Many of us prefer to combine our support for the causes and people we care about with a desire to save on taxes. Fortunately, there are strategies to help us accomplish both. Whether you want to donate to charity or invest in a loved-one’s future, consider these tax‐smart ways to make your giving go further.
Give the Gift of Education
Consider giving gifts through a 529 education plan. Anyone, including grandparents, can contribute up to $15,000 per year ($30,000 for married couples electing to split gifts) to any individual’s 529 plan, without incurring federal gift tax or using the federal lifetime gift tax exemption.
Many states offer state income tax deductions to residents who contribute to their own state’s plan, while other states offer tax deductions regardless of which plan you invest in. Additionally, unique to 529 plans, the federal tax code allows you to front load up to five times the annual gift tax exclusion in a single year.1 Single individuals are therefore able to contribute up to $75,000 per recipient in a single year, while married couples electing to split gifts can contribute up to $150,000 per recipient in a single year. If you have the means, you can even take advantage of six-year gift tax averaging. To do this, you can contribute one year’s worth of gifts in December, followed by five years’ worth of contributions in January, effectively making six years’ worth of contributions in just two months.2 Also note that 529 plan account owners may now take federal income tax-free 529 plan distributions for certain apprenticeship expenses and student loan repayments.3
Morgan Stanley recently launched the Morgan Stanley National Advisory 529 Plan, the first 529 plan of its kind, made available nationwide, and offered exclusively to Morgan Stanley clients. You can select from goals-based asset allocation portfolios, guided by Morgan Stanley thought leaders, that align with your unique time frame, risk profile and goals, while gaining access to institutional caliber fund managers and pricing.
Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine whether this strategy might be appropriate for you.
Reduce Estate Taxes with Financial Gifts
Make financial gifts before year end to help reduce estate taxes. You can gift up to $15,000 ($30,000 for married couples electing to split gifts) per recipient to an unlimited number of individuals per year without incurring a federal gift tax. Note that you can’t carry over unused annual exclusions from one year to the next. The transfers may help your family as a whole pay fewer taxes if you give income-earning property to family members in lower income tax brackets. The $15,000 annual exclusion doesn’t count against the federal gift tax exemption of $11.7 million for individuals or $23.4 million for married couples in 2021.4 It is noteworthy that gifts in the form of tuition payments made directly to an educational organization, as well as medical expense payments made directly to the provider, are not taxable gifts and do not count against your $15,000 annual exclusion for gifts or reduce your federal lifetime gift tax exemption.
Donate Appreciated Investments
Appreciated investments can be donated to qualified charitable organizations. Note that donating appreciated investments that you have owned for more than a year can allow you to take a larger deduction than donating appreciated investments that have been held for one year or less.5
Give Through a Donor Advised Fund
A donor advised fund (DAF) is one option for gifting appreciated investments. A DAF, such as the Morgan Stanley Global Impact Funding Trust (MS GIFT), gives taxpayers a tax-efficient way to donate stock, mutual funds or other assets and claim a tax deduction.6
Utilize a Grantor Retained Annuity Trust (GRAT)
A Grantor Retained Annuity Trust (GRAT) may allow you to pass the appreciation in the value of assets in the GRAT, in excess of a hurdle rate set by the IRS (known as the 7520 rate), to your beneficiaries with potentially little to no federal gift tax consequences. Given the low interest rate environment, this may be an even more attractive opportunity. Speak with your Tax and Financial Advisor to see if this strategy may make sense for you.
Morgan Stanley Naples Branch
(239) 449-7853
advisor.morganstanley.com/the-calleja-group
Juan Ocanas
First Vice President
Senior Portfolio Manager
Family Wealth Advisor
Financial Planning Specialist
Financial Advisor
References:
1. An election to do so must be made on a gift tax return for the year of the gift.
2. This assumes there are no other gifts made by the donor to the beneficiary in the year of contribution to the 529 plan or in the four years after the year in which an accelerated gift is made. Any gifts made in the year of contribution to the 529 plan or in the four years after the year in which an accelerated gift is made may result in a taxable gift or use of the donor’s federal lifetime gift exemption. If the donor dies within five years of making an accelerated gift, a portion of the gift may be included in the donor’s estate.
3. Note, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 signed into law Friday, December 20, 2019, expands the definition of qualified higher education expenses for federal income tax purposes to include certain costs associated with qualifying apprenticeship programs and up to $10,000 (lifetime limit per individual) in amounts paid towards qualified student loans of the 529 plan designated beneficiary (or such beneficiary’s sibling). Note, however, using 529 plan distributions to repay qualified student loans may impact the deductibility of student loan interest. This new provision applies to 529 plan distributions made after December 31, 2018. The state tax treatment of 529 plans (including the state tax treatment of contributions and distributions) may be different from the federal tax treatment and may vary based on the particular 529 plan in which you participate and your state of residence. If the applicable state tax law does not conform with the federal tax law, 529 plan distributions used to pay certain expenses, such as principal and interest on qualified student loans and/or qualifying apprenticeship costs, may not be considered qualified expenses for state tax purposes and may result in adverse state tax consequences to the account owner or designated beneficiary.
4. Any use of your lifetime federal gift exemption will result in a corresponding reduction in your federal estate tax exemption available at your death. A portability election must be made on a deceased spouse’s estate tax return in order for the unused portion of the deceased spouse’s estate tax exemption to be available to the surviving spouse.
5. If a stock is held for one year or less, the deduction a taxpayer receives for donating that stock to a qualified charitable institution is limited to the lesser of the fair market value or cost basis of the stock. If the stock is donated after it has been held for more than one year, the taxpayer may receive a deduction equal to the fair market value of the stock.
6. The maximum deduction for a cash gift to a DAF is limited to 60 percent of adjusted gross income (AGI); deductions exceeding AGI limits may be carried forward for up to five years. Grants can be made over time to any U.S. organizations that are tax-exempt public charities, U.S. religious houses of worship, U.S.-qualified foreign charitable organizations and at a reduced benefit, to certain domestic and foreign organizations that do not qualify as U.S. public charities.
Disclosures
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.
Juan Ocanas is a Financial Advisor in Naples at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at Juan.Ocanas@MorganStanley.com or by telephone at (239) 449-7853. His website is https://advisor.morganstanley.com/the-
calleja-group
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Investment Advisers Act of 1940, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA.
This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Contribution limits vary by state. Before investing in a 529 plan, investors should consider whether tax or other benefits are only available for investments in the investor’s home state 529 college savings plan.
Investors should carefully read the Program Disclosure statement, which contains more information on investment options, risk factors, fees and expenses, and possible tax consequences before purchasing a 529 plan. You can obtain a copy of the Program Disclosure Statement from the 529 plan sponsor or your Financial Advisor.
The Morgan Stanley Global Impact Funding Trust, Inc. (“MS GIFT, Inc.”) is an organization described in Section 501(c) (3) of the Internal Revenue Code of 1986, as amended. MS Global Impact Funding Trust (“MS GIFT”) is a donor-advised fund. Morgan Stanley Smith Barney LLC provides investment management services to MS GIFT. Back office administration provided by RenPSG, an unaffiliated charitable gift administrator.
While we believe that MS GIFT provides a valuable philanthropic opportunity, contributions to MS GIFT are not appropriate for everyone. Other forms of charitable giving may be more appropriate depending on a donor’s specific situation. Of critical importance to any person considering making a donation to MS GIFT is the fact that any such donation is an irrevocable contribution. Although donors will have certain rights to make recommendations to MS GIFT as described in the Donor Circular and Disclosure Statement, contributions become the legal property of MS GIFT when donated.
The Donor Circular and Disclosure Statement describes the risks, fees and expenses associated with establishing and maintaining an MS GIFT account. Read it carefully before contributing.
Juan Ocanas may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration, https://advisor.morganstanley.com/the-calleja-group