Charitable giving may be an essential part of your life and legacy. However writing checks here and there might not be the best way to optimize your giving.
Here are some ways to bring intention and strategy to your charitable giving today and in your estate plan for the future.
Four Tax-Friendly Ongoing Charitable Giving Strategies
When you give intentionally, you can maximize the value of your gift and manage your tax liability. Here are some ideas for executing both throughout your life.
- Open a Donor Advised Fund. A donor-advised fund (DAF) allows you to set aside assets now that you can use later to provide grants to charities. When you contribute to a DAF, you can claim the charitable deduction immediately but invest the money so that it grows over time. After that, you may recommend grants to qualified public charities. DAFs are unique ways to complement sustained giving without losing sight of tax benefits.
- Bunch Your Charitable Donations. Rather than contributing the same amount each year, some find that “bunching” their donations allows them to take advantage of the tax deduction. For example, if you planned to contribute $10,000 to charity each year, you may set the funds aside and instead contribute $20,000 every other year in order take advantage of the tax benefits of an itemized return.
- Initiate A Qualified Charitable Distribution if you’re retired. Qualified charitable distributions (QCDs) allow you to avoid taxation on your required minimum distributions in retirement. Rather than taking your RMD and using the after-tax amount to make a charitable donation, a QCD allows anyone age 70.5 or older to send up to $100,000 worth (per individual) to a charity directly and avoid taxation entirely. This could be a great way to manage your retirement income, which impacts several areas of your plan, like the taxation of Social Security benefits, Medicare IRMAA, and other investment taxes.
- Donate highly-appreciated assets. Yes, you can donate assets to charity. Doing so relieves you of the capital gains burden and boosts the value of the gift. How? When you donate the assets in-kind, you don’t owe taxes on any embedded unrealized gains. And you still get to deduct the fair market value. This is more efficient than selling the assets, paying capital gain tax, and donating the net proceeds. The charity can either sell the assets to use the cash or keep the investment for its additional growth potential.
Combining Strategies
We recently met with Bob Goldman and Liz Drake of Bob Goldman Law, LLP who confirm that donor advised funds are a great vehicle to deposit appreciated stock. First, this allows you to sell and make smaller donations from the appreciated stock/fund vs having to make one large direct gift. Second, front loading the DAF accomplishes the discussed “bunching” strategy. Both strategies enable you to get the maximum tax benefit while allowing you to spread your generosity over a number of charities or extended period of time.
As you can see, there are several creative ways to boost the value of your gift and receive valuable tax benefits.
While these ideas lay a strong foundation, there may be other ways to amplify the power of your gifts and make philanthropy a core part of your life and legacy.
How To Meaningfully Include Charitable Giving Into Your Legacy
If charitable giving has been a staple throughout your life, it only makes sense to extend it to your legacy and for generations to come. There are several ways to go about accomplishing that goal.
Establish a Charitable Remainder Trust.
This irrevocable trust allows you or designated beneficiaries to receive payouts for an established period, either a specified number of years up to a maximum of 20 or until your death. Once the trust term expires, the remaining assets in the trust pass to your charitable beneficiary.
This is a great option if you need income from the assets within the trust but also want to report a charitable donation now.
Fund a Charitable Lead Trust
These are similar to charitable remainder trusts but work in reverse. The charity receives income for a set period, but the assets are then left to your named beneficiaries.
In addition to the tax incentives each of these trust structures provide, they also deliver a mechanism for avoiding probate. Your gifts will transfer more quickly and privately than they would if they remained part of your estate.
Be aware that charitable trusts—both lead and remainder—can be quite complex, and there are many variations that affect what you are able to deduct. If you think a charitable trust might be a good tool for you, it’s best to discuss your specific situation and goals with a professional that has the appropriate expertise to explain the pros, cons, and tax implications of any suggested structure.
Make A Charity A Co-Beneficiary
Common account types like IRAs, 401ks, and life insurance policies all have an option for naming designated beneficiaries directly on a provided beneficiary form. These elections take precedence over anything in your will, so they are very effective estate planning elections.
Naming a charitable organization as the beneficiary or co-beneficiary on these accounts is a simple and effective means of achieving your charitable intent.
Start A Private Foundation or Non-Profit
A foundation is a fantastic way to help charitable organizations even after you pass. By including your family in the foundation’s activities, you not only create a meaningful way of connecting with each other but increase the likelihood that your family members will continue the foundation’s efforts after you are gone.
With a foundation, you have the freedom and flexibility to support causes outside of 501(c)(3) tax-exempt organizations. You may consider extending your gifts to an individual, scholarship, endowment fund, and other charitable organizations that embody your shared values.
Foundations provide a public platform for doing good and can help cement philanthropy as a family legacy. Perhaps you’ll create a family foundation where your loved ones serve on the board and in other key leadership roles. That encourages deep family bonds and supports important causes.
Again, foundations come with complex IRS rules and requirements, so be sure to work with trusted parties (financial advisor, attorney, CPA, etc.) to ensure it’s set up correctly and operates efficiently and in compliance with the appropriate regulations.
Create A Comprehensive Giving Plan That Supports Your Long-Term Goals
Tax advantages seldom drive charitable giving, but they are a pleasant bonus for doing something that can make a positive and meaningful impact on causes you care about.
Understanding your charitable giving goals and ensuring your actions align with them now and in the future is the most important aspect of your plan. However, using appropriate vehicles to maximize your gifts and keep an eye on taxes is not only smart but can help ensure you provide as much value as possible.
Bob Goldman explains that clients often want to do charitable planning in order to demonstrate their values. He suggests that clients expand upon this feeling by teaching their values as well. Include children and grandchildren when opening and funding your donor advised fund. Teach them how to do the legwork when researching charities, which includes reading through financial and mission statements of the charity. Have them draft up gift agreements if your donation is intended for something specific when making large gifts.
Not sure how to perform the research? Attorney Goldman suggests utilizing a strategic philanthropic advisor. Maybe you want to make a large donation to benefit a specific cause but don’t know where to start. A philanthropic advisor should bring you and your family at large through a clarification exercise to help create value statements. From there they can do the research needed to widdle down options to just a few to choose from.
And, of course, there are many ways to be involved in charity work in addition to giving money. Donating time, volunteering regularly, sitting on the board, or leading events are all helpful, and by being directly involved, you will get to see the fruits of your financial gifts firsthand.
If you’re interested in learning more about deepening your philanthropic efforts, reach out to our team today.
