| Even if you’re not a millionaire, you may have reached a stage where you think, It’s enough. It could even be a bit too much. A second car may sit mostly in your garage. A beloved vacation home may have transformed from a place to relax to a place to maintain. Your pension? If you’re fortunate enough to have one, it, too, could be paying you more than you really need.
But how do you share your resources in a way that is simple, smart and financially prudent? And how do you keep the peace within your family if not everyone agrees on your choices? For the answers, we’ve asked experts in the fields of charitable giving and estate planning to suggest the best ways to give under the new tax law—for you and your recipient alike—in seven common situations.
Your grandchild needs a college education
Solution: Use her parent’s 529 plan.
The best way to save for a child’s future education is through a 529 college saving plan, where money grows tax free and can be withdrawn tax free for qualified educational expenses, including full tuition and expenses for higher education. A provision in the new tax law allows up to $10,000 a year in tax-free withdrawals for precollege education as well, though not all states may adopt this provision.
You can create an account on your own for your grandchild, but it may be wiser to contribute to an account created by the child’s parent. Here’s why: Financial aid formulas categorize distributions from a grandparent’s 529 plan — but not from a parent’s plan — as student income. That could reduce any potential financial aid award. (If you’ve been saving in a 529 in your name, many plans let you switch ownership to the parent, as long as you don’t change the beneficiary.)
If you want to hold on to the account, Dawn Brown, a senior financial planner with Lassus Wherley in New Providence, New Jersey, suggests you delay paying until the last two years of college. That’s because schools now look at the tax return from two years earlier to determine aid eligibility for the upcoming year, which means you can pay tuition during the student’s final two years without affecting financial aid.
How to do it: Either deposit the money directly into a parent-owned plan, or give the money directly to the parent with the expectation that he or she will deposit the money in a 529. (Depending on the state, the account owner might get a state tax deduction for contributing to a 529.) The account owner can choose funds to invest in; age-based plans are usually the best choice. To find out more about different state plans, go to Savingforcollege.com.
You’d like to set up a charitable foundation and you’re not Bill Gates
Solution: Contribute to a donor-advised fund.
Donor-advised funds (DAFs) are like charitable savings accounts. You get an immediate tax deduction for any cash (or investments) you put in the fund. This allows you to front-load two or three years’ worth of giving into one year, claiming a charitable deduction for a year when you plan to itemize your deductions instead of taking the newly increased standard deduction. Then you can direct grants from the fund to your church, alma mater or other public charity, on whatever timetable you wish. Any money sitting in your fund can be invested tax free, so you potentially have more money to give later on. And you can name other family members as advisers of the fund so they can make donations to charities as well. Just remember: Once you put money in, you can’t take it out; it must go to charity. DAFs are especially useful if you have a big spike in income one year or if you expect to be in a lower tax bracket in future years.
How to do it: Open a DAF at a sponsoring organization, such as a community foundation or large investment firm. Fidelity Charitable and Schwab Charitable, for example, require a relatively low minimum initial contribution of $5,000 and let you fund your DAF with cash or assets including stocks and real estate. They’ll sell any noncash assets you put in and give you a menu of different funds for investing the proceeds.
Your children have different levels of need
Solution: Divide equitably, and put this in writing.