Charitable Gifting Strategies

Incorporating charitable giving into a financial plan is one of the most rewarding aspects we can help our clients achieve. We like to refer to these conversations as part of our “Giving Box” strategy planning. By having a meaningful discussion about charitable giving patterns and goals, we may be able to help uncover ways to enhance the benefit(s) of your gifts through various methods, including:

♦ Reducing taxes owed on your gift.

♦ Providing a sustainable gift to a meaningful charity you support.

♦ Providing personal peace of mind that your gifts can last beyond your lifetime.

While everyone’s situation is different, below are four specific charitable planning strategies, of which you may be unaware, but could apply to you and provide benefits in your own charitable gifting activities.

1. Donor Advised Funds (DAFs) – DAFs allow a donor to gift a lump-sum of cash, or highly appreciated assets, into a set-aside investment account and potentially receive a tax deduction in a single tax year. This designated fund, or account, then holds the assets that can be used to distribute gifts to the donor’s favorite causes over the course of many years into the future.

• An ideal client for a Donor Advised Fund would be one looking to maximize the tax benefits associated with a larger charitable gift in a single year through front-loading a number of years’ worth of charitable gifts. This is sometimes used when there is a sale of a business or a sudden increase in income occurs in a single year – a charitably-minded person may be looking to take a larger tax deduction by grouping future gifts into that same year.

2. Donating highly appreciated assets – While some may not be interested in establishing a Donor Advised Fund for their highly appreciated investment assets, donating these assets directly to charity still offers potential advantages for charitable gifting and tax efficiency. This approach helps donors avoid capital gains taxes for selling the investment.  Instead, the investment is given directly to the charity. Since 501(c)(3) charitable organization do not pay income taxes, the charity can then sell it with no taxes incurred. Ultimately, donors could choose to increase the dollar amount donated, knowing there would be no taxes owed and the charity can benefit from the full amount gifted.

• An ideal client in this situation would be one who holds a highly appreciated stock or mutual fund relative to its cost basis. Gifting this stock or mutual fund to the charitable organization may allow for the donor to realize an income tax deduction that is equal to the fair market value on the date of the donation, which can then be used over the next five years, or until the deduction is fully exhausted.

3. Qualified Charitable Distributions (QCDs) – These are direct transfers made from an IRA and sent directly to the qualified charity(ies) of the donor’s choice. A QCD is not counted as taxable income. The IRA owner must be at least age 70 ½ or older in the year when making a QCD. The amount transferred to charity can be counted toward satisfying an IRA owner’s Required Minimum Distributions (RMDs), up to $100,000.

• An ideal client to begin QCDs would be an individual who is already required to take an RMD for the tax year but does not have a specific need for the income. The client would elect to have the distribution made directly to the charity of choice and this distribution would be made income-tax free.  This allows the client to manage his or her taxable income as well as satisfy the IRS requirements for distributions from an IRA.  Taking Qualified Charitable Distribution’s prior to age 72 (for those who can now wait until age 72 to being taking RMDs) provides an opportunity for the individual to use tax deferred IRA assets now to reduce future RMD amounts that would begin at age 72.

4. Charitable Remainder Trusts – These types of trusts create an income stream for life for a designated beneficiary with the trust’s corpus then being donated to a charity of the donor’s choice after the death of the beneficiary.

• An ideal client for a Charitable Remainder Trust would be an individual who has an income-producing asset with considerable capital gains, such as a stock or business property, and would like to be able to rely on an income stream during life produced by this donated asset. Once this person passes away, the charity will then receive the asset and be able to sell it, tax-free, to complete the receipt of the donated asset.  Also, due to the irrevocability of this type of charitable gifting strategy, assets are removed from the gross estate and will not be subject to estate taxes.

These four examples represent just a small number of the many options and advantages which may be available to those who choose to include charitable gifting in their overall financial planning process. While the proper strategies chosen will depend on each investor’s specific situation, and should be reviewed with your trusted tax and legal professional, it is at least worth exploring to see if there may be a more tax-efficient and sustainable manner to plan your charitable gifting goals. We look forward to any “Giving Box” conversations you may be interested in having to see if a change in your giving structure could be beneficial. 

Please contact our office at 419-422-4400 to schedule a meeting to begin preparing for how to achieve your charitable gifting goals along with addressing any other situations important to realizing your total wealth management goals.