Charity Begins at Home

Better tax breaks and low interest rates make this an ideal time to shower loved ones with your generosity.

By Jane Bennett Clark, Senior Associate Editor

From Kiplinger's Personal Finance magazine, April 2009

When family members need a hand, you'd like to help out if you can -- but you also want to be sensible with your money. With improved tax breaks, record-low interest rates and a few evergreen strategies, you can accomplish both goals and maybe help yourself in the process.

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Give to the max. If you have cash to spare, this is a great time to slip some money to the kids. For 2009, you can give away up to $13,000 to as many people as you like without triggering the gift tax. That's $1,000 more than last year. And together, you and your spouse can jointly give up to $26,000 to anyone you choose (up from $24,000 in 2008) without having to file a gift-tax return with the IRS or eating into your lifetime gift-tax exclusion of $1 million. (The gift-giver, not the recipient, pays the gift tax.)

Now could also be the time to give away left-for-dead stocks, on the theory that they have nowhere to go but up. And with stock prices depressed, you can give away many more shares than before. For example, if you own a stock that trades at $100 a share, you could give away 130 shares without triggering the gift tax. But if it's dropped to $50 a share, you could give away 260 shares.

That's a good strategy for bolstering your kids' portfolios in the long run. Still, it doesn't bail them out in a crisis, says Mary Ann Mancini, of Bryan Cave, an estate-planning firm. "If you give away an appreciated asset and the kids need the cash, they are going to sell it and be burdened with the capital-gains tax. It's better to give them cash."

Either way, the higher gift-tax exclusion means you can whittle more from an estate that would otherwise be subject to the estate tax. This year, the tax kicks in on estates worth more than $3.5 million. In 2010, the estate tax is scheduled to disappear entirely -- but don't count on it. President Obama supports making the current $3.5-million exclusion and top rate of 45% permanent.

Kick in to the college fund. Getting vibes that your grandkid's college fund has taken a hit? Help the parents out by contributing to their 529 savings plan, or set one up on your own. With these state-sponsored accounts, the money grows tax-free and escapes tax altogether if it is used for qualified education expenses. More than two-thirds of the states give 529 owners a deduction or tax credit for contributions.

Some offer the deduction to Good Samaritans (or grandparents) who contribute to someone else's account.

Contributing to the parents' account is convenient, but setting up your own account gives you more options. For example, having the account in your name lets you switch beneficiaries from one grandchild to another (if, say, the first grandkid skips college) or keep the money if your nest egg goes splat. (If you withdraw the money for your own use, you'll owe tax and a 10% penalty on any earnings.) For some grandparents, that control trumps convenience, says Joseph Hurley, of Savingforcollege.com. "The ability to take back the account is reassuring."

Contributions you make to the parents' account or to your own account are deemed gifts by the IRS. You can contribute up to $13,000 ($26,000 as a couple) this year without triggering the gift tax and remove that amount from your estate. You can also contribute $65,000 ($130,000 as a couple) at once and spread the gift-tax exclusion over five years. Be sure you don't exceed the limit on contributions for the plan.

Keep in mind that money in your 529 account is deemed a resource when it comes to your Medicaid eligibility in the event you need nursing-home care and don't have other money to pay for it. You would be required to spend those funds for your own care before the government stepped in to help.

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