I politely say thank you and take it home and then put it in my donate box; I am a bit of a neat nick and I go through the house 4x a year and de-clutter etc.... and then take it to the good will. If it is a on going nick knack giver I send a thank you note with with the following:
Dear Jane and Bob
It was so good to see you again; I hope that your New Year is off to a good start and that all is well with you. I want to thank you for the beautiful ____________, it was so thoughtful of you to think of us!! We have managed to find the perfect place for it in our home; thank you!!! Jim and I were recently discussing how many wonderful things we have received over the years and how blessed we are to have such thoughtful and generous friends and family; so much so that we have no more room to fit them all!! We are asking that for the coming years in lieu of gifts, that a donation be made to Toys for Tots so that your generosity and kindness can be shared with a child who may not have a Christmas without wonderful people like you. Thank you again for the beautiful _________, and we are looking forward to sharing Christmas with you again next year!!!!
Much Love,
____________