Charitable Giving

Legacy Planning - Charitable Giving

Charitable giving is an important aspect of financial legacy planning. It allows individuals to make a positive impact on society while also creating a lasting legacy that reflects their values and priorities. Charitable giving can take many forms, from donating money to a favorite charity or cause, to setting up a charitable trust or foundation. The gifts you make may also reduce your federal and state income tax, reduce estate tax, and/or possibly reduce or eliminate capital gains tax. The following strategies help guide you on how to make Charitable Giving a Part of your Financial Plan.

Types of Charities

For purposes of charitable giving, charitable nonprofit organizations are classified as private foundations or public charities, and there are limits to deductions one may take depending on the charity type and property type. In order to qualify as an income tax deduction, one must itemize to deduct a charitable gift, and secondly, they may only be contributions to qualified charitable organizations. The gift has to be made prior to the close of the taxable year or December 31st for the gift to be deductible in that year.

Types of Gifts

When making charitable gifts in cash, the cash gift is the deductible amount, up to 60% of the donor’s adjusted gross income (AGI). Unlike cash gifts, deductibility rules on gifts of other kinds of assets become a little bit more complex. One savvy strategy is gifting appreciated stock. The full market value of the stock is received by the charity; the donor receives a charitable deduction and avoids capital gains tax. Other options include gifting tangible personal property (e.g., artwork, coins or memorabilia collection, etc.) or real estate, but these gifts will be subject to more stringent IRS rules, i.e., fair market valuation, real estate depreciation recapture, etc. IRS Publication 526 (Charitable Contributions) and IRS Publication 561 (Determining the Value of Donated Property) are great resources and a good place to start.

Charitable Giving from your IRA

Qualified Charitable Distribution.

If you are age 70 or above, a qualified charitable distribution (QCD) could be just the thing for you. A donation of up to $100,000, which comes out of your IRA and goes to a qualified charity, is not included in your taxable income. This will also count as part of your required minimum distribution, should you have one. If you have not yet started your required minimum distributions, a QCD can lower the value of your IRA, which will lower your future required distributions.

Charitable IRA Bequests

Since retirement assets can be among the highest-taxed assets in any estate, you may consider them as a candidate for charitable bequests. There are advantages of leaving your retirement assets to a charity:

  • Neither you and your heirs, nor your estate will pay income taxes on the distribution of the assets.
  • Increase the impact of the bequest – Charity would NOT have to pay income taxes on your donation when it receives assets from your retirement account, thus making use of the full amount of your gift.
  • Decrease the estate tax burden on your family – Your assets would pass directly to charity so your estate would be eligible for a federal estate tax charitable deduction on the account’s value, which can be used to offset the estate taxes should you have a taxable estate.

Charitable Trusts

Charitable trusts can provide benefits to charity as well as to your family or yourself. There are two types of charitable trusts, and they differ primarily in how the trust’s income is allocated: The first one is the Charitable Lead Trust (CLT), which allows you to direct the trust income payments to charities during your lifetime. The remainder of the assets goes to you, your spouse, or other beneficiaries when you pass away, or at the end of a shorter term of your choosing. The other type is the Charitable Remainder Trust (CRT) which allows you and/or beneficiary to receive the trust income payments during your lifetime and give a portion of the assets to one or more charities. Charitable trusts are not for everyone. They are a type of irrevocable trust, which means you cannot make changes to the details of the trust once the trust has been created. Also, there is an initial cost in setting up a charitable trust, so it may not be worth the cost if you are only donating small amounts to a charity. We suggest you consult with your estate planning attorney and/or tax advisor when contemplating doing gifting strategies by way of charitable trusts.

Donor Advised Fund

A Donor Advised Fund (DAF) is an account that allows for tax-smart charitable giving over time. It may be an alternative to consider besides a charitable trust. You can contribute cash or investments, including highly appreciated assets, to a DAF and be eligible for a current-year tax deduction. Once assets are in the DAF, you can grant them out to various charitable organizations over time as you desire. Talk with your trusted investment advisor to learn more about this type of account and the costs or fees associated with it. If you want to bunch your charitable dedication for tax reasons, yet make many smaller charitable gifts over time, a DAF may be a good solution for you to consider.

Charitable giving is an important aspect of financial legacy planning. It allows you to make a positive impact on society while also creating a lasting legacy that reflects your values and priorities. By including charitable giving in financial legacy planning, you can ensure that your charitable goals are met even after you are gone. It is important to choose a cause or charity that aligns with your values. Work with a trusted advisor, and communicate your intentions to family members and loved ones.

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