Philanthropic tax strategies. With certain wealth events, you can either spend your money, give it to the government, or give it to charity. We help you choose the right Charitable organization, maximize your endowment and feel the wholeness of having made the world a better place through philanthropy.
1. Gift Appreciated Securities to Avoid Capital Gains
If you have significant unrealized gains in your investment portfolio, consider gifting a portion of your appreciated securities to charity. You avoid the capital gains that you would incur if you sold the shares, and it is possible to receive an income tax deduction equal to the full fair market value of the shares you give away, even if your cost for those securities was much lower.
For example, if you invested $20,000 in a stock that is now worth $100,000, you could sell the stock, recognize capital gains of $80,000 and walk away with net proceeds potentially less than $75,000. Alternatively, you could give the stock to charity. The charity receives a $100,000 benefit (since it can sell the stock tax-free). Meanwhile, you receive a potential income tax deduction of up to $100,000 that could save you several tens of thousands of dollars in taxes. Added together, the total benefit to you and charity may be close to double what you would receive if you sold the stock.
2. Time Your Gifts Wisely, Based on Your Income Expectations
If you expect to receive an influx of income, such as a large bonus or proceeds from the sale of a business, consider making a larger donation than usual in the same calendar year. But be mindful of the type of charity you choose. To ensure availability of the maximum deduction (60% of your AGI), you need to give to a public charity. Luckily, if you’re uncertain on the charities, you can use a Donor Advised Fund.
A Donor Advised Fund program, such as Fiduciary Trust’s Charitable Giving Program, allows donors to make a completed gift to a public charity and receive the maximum potential tax deduction immediately with the assets held in the fund for you still to advise on the disbursement to the charities you eventually decide to support.
For example, we recently assisted a client who sold her business and was facing a substantial tax bill. Her philanthropic goals were already established—she was donating $10,000 every year to various charities. To help offset the spike in income in that year, we recommended that the client front-load a Donor Advised Fund. She was able to contribute $100,000 within a few days, which happened to fall between Christmas and New Year’s Day, and claim a charitable deduction for the full contribution on her income taxes for the current year—reducing the tax burden generated by the sale of her business while setting aside funds to fulfill her charitable giving for a number of years to come.
3. Name a Charity as the Beneficiary of your Retirement Plan
If you plan to leave money to charity at your death, you should always consider having the funds be paid out from your IRA or other tax-deferred retirement plan. Leaving all or a portion of your IRA to charity can provide much greater tax advantages to your heirs than donating assets from a non-retirement account.
Unlike non-retirement assets, your individual beneficiaries will typically need to pay income tax when they pull money out of a traditional IRA or 401(k) plan they inherit from you. And, if your estate is valued above the current estate tax exemption amount ($11.58 million in 2020; $23.16 million for a couple), these assets may only reach your beneficiaries after being subject to estate tax at 40%. Ultimately, your beneficiaries may receive less than 50 cents on the dollar from your account, depending on their tax brackets and your estate tax situation. A charity, in contrast, is not subject to estate or income tax and will receive 100% of the funds.
You also don’t need to leave all of a retirement account to charity. You can leave a percentage or a specific dollar amount and still reap a tax benefit. You can also leave your retirement account to a charitable remainder trust and yield benefits for both individual beneficiaries and charity.
4. Don’t Wait Until You Die to Make Gifts
Although many people include bequests in their wills, giving directly to charity during your lifetime can be both much more personally gratifying (because you’re alive) and much more beneficial from a tax perspective. You can claim an income tax deduction, which you can’t do with a gift at death, while also removing the assets from your estate for estate tax purposes.
One way to provide for a charity at your death while not sacrificing the income tax benefit is to ask your spouse to make the donation if you die first. Your will or trust might leave a specific amount to your spouse, with the request (but not the direction) that he or she donate the amount to the charity. Or you might leave your spouse a letter or simply trust them to remember your request. If your spouse dies first, then you would give amount to the charity yourself. Of course, this is a non-binding request, so you’ll want to be confident that your spouse will honor your wishes. If the circumstances lend themselves to this approach, we recommend it often.
5. If You Are 72 or Older, Gift IRA Assets
Due to their fully taxable nature, traditional IRA assets are also a natural choice to fund charitable gifts during your lifetime. If you are 72 or older, you can transfer up to $100,000 per year directly to a charity, tax free. You won’t get an income tax deduction for the gift, but the amount is not included in your gross income. The other major benefit: charitable distributions count toward the required minimum distributions that you must make each year if you are over 72.
6. Take Advantage of Low Interest Rates with a Charitable Lead Trust
There are two basic types of charitable trusts: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). Today’s relatively low interest rate environment affects both.
CRTs provide you or your beneficiaries with a stream of income over the life of the trust and turn over the remaining assets to a charity at the end of the trust’s term. How much of your contribution to a CRT is tax-deductible depends on the present value of the remainder interest in the trust, which is determined by an IRS calculation.
CLTs work the opposite way, making annual contributions to a charity and distributing the remaining assets to beneficiaries at the end of the trust’s term. With a CLT, you receive a deduction based on the present value of the stream of distributions the CLT makes to charity. Lower interest rates work in favor of CLTs by increasing this present value, thereby increasing your potential tax deduction. In addition, any appreciation of the trust assets above and beyond the IRS-calculated interest rate results in a tax-free gift to your beneficiaries. When rates are low, the opportunity to generate such excess return can be especially strong.
