The Two Faces of Gifting: Preparing for 2021 Year End

By Jeffrey Hedges, Partner  jeff@tanagerwealth.com

In these extraordinary times, it is important for clients to review their short and long-term gifting objectives.  The two faces of gifting are: what can a donor do to support both charitable institutions and individuals.

Helping Charities:

The UK offers very attractive incentives to support charities.  If this is combined with gifting through a dual qualified UK-US charity, a donor also benefits from a US charitable deduction which, exceptionally this year, is up to 100% of your Adjusted Gross Income for cash gifts with a 5 year carry over as a result of the American Rescue Plan enacted in March.

Gifts of cash to a dual qualified charity up to one’s UK taxable income benefit from Gift Aid Reclaim and allow Higher Rate and Additional Rate taxpayers to recoup a portion of the UK tax paid.  If a UK taxpayer wants to give £50,000 to a UK or US charity using a dual qualified charity, that gift could cost as little as £41,200 and if you are a Higher Rate (40%) taxpayer you can claim a credit for the equivalent of £10,300 on your next UK tax return or a credit of £12,875 if you are an Additional rate (45%) taxpayer.

Clients over 72 can use all or part of their IR Required Distribution up to $100,000 by gifting it to charity, which will reduce their income in the current tax year

For clients wishing to establish a long-lasting legacy, which could involve their children and other family members, they can establish their own dual qualified donor advised fund (DAF).  In the case of the one provided by the Anglo-American Charity Limited, the minimum gift to set up the fund is $100,000 in marketable securities or cash.  Clients who already have a DAF in the US can transfer some or all existing holdings to fund a new dual qualified DAF.

Helping Family & Friends:

The single most effective way of gifting to lower potential estate tax is to take advantage of the $15,000 US annual gift allowance ($30,000 for a married couple) allowing one to gift to anyone.  While this does not help with UK inheritance tax immediately, if the donor outlives the gift by 7 years, the gift is removed from their UK estate under the Potentially Exempt Transfer (PET) regime.  Also, the UK has a concept of ‘normal expenditure out of income’, which is not subject to inheritance tax.  It assumes that if the donor has more than enough income for their own needs, they can provide for others.  A donor could use up to their US annual allowance to pay rent for a child or support an elderly relative financially and benefit from the UK’s interpretation of using excess income, for example.

For those who have the means, using a portion of their US inheritance tax exemption of $11,700,000 ($23.4 million per married couple) this year makes sense if one expects the Biden Administration to lower the life time exemption to as little as $3.5 million per person.  In order to be grandfathered if the law changes, the gift must be made before new legislation is enacted: intention to gift is not sufficient.  These gifts can be coordinated with the PET (Potentially Exempt Transfer) regime and advice should be sought from appropriately qualified estate planning attorneys with US and UK experience.

If you are interested in more information on any of the topics discussed here, please contact your Tanager Advisor.  It is recommended that you consult your tax advisor on the appropriateness of gifting for your specific circumstances.  Gifts intended to qualify for the 2021 calendar year should be made prior to December 15th.

Disclosures

Please be advised that Tanager partners, Jeffrey Hedges and Alex Eichhorn are Directors of the Anglo-American Charity Limited and so we disclose this information as a known conflict of interest.

As everyone’s circumstances are different, we cannot say any course of action would be appropriate for you, therefore this is not financial advice. If you are interested, please consult your tax and financial advisors to ensure gifting is appropriate for your financial situation.

 

Recommended Posts