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Financial Planning November 2019 | How to Make Charitable Giving a Part of Your Financial Plan

With the leaves changing and the cold weather moving in, Thanksgiving or the time to “give back,” whether to charity, family or education, heralds the start of the Holiday Season or the Season of Giving. The holidays bring out the Giver in all of us as we look for ways to help our neighbor or be a blessing to those in need, but there is an extra bonus in charitable giving. The gift 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.

Our team at Bedell Frazier is ready to assist you.

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.

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 of the more common options includes gifting appreciated stock. The full market value of the stock is received by the charity; the donor receives a charitable deduction and avoids long term capital gains. 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.

Gifts to family and friends fall under the Annual Exclusion gift limits, which for the 2019 tax year is $15,000 per donee and the gift is free of any transfer or gift tax. You may gift to as many related or unrelated people as you would like each year. When you and your spouse donate as a married couple, this $15,000 amount is doubled; you each get a $15,000 exclusion per donee. Two applications or examples, among many, of how people may use this gifting scheme are: 1) make tax-free gifts by making payments for qualified medical expenses or 2) pay tuition for someone else. To qualify for the exclusion, one must pay the qualifying medical institution or educational organization directly. Another specific way of paying for someone’s education and avail of some tax benefits is to contribute the gift or donation to a 529 education savings plan. The growth in the investments in these accounts is tax free, if used for qualified expenses.

Charitable Giving can also come from your IRA. If you are over 70-1/2 and taking a required minimum distribution (RMD), a QCD (qualified charitable distribution) could be just the thing. The donation, which comes out of your IRA and goes to a qualified charity, counts as part of your required minimum distribution and is not included in your taxable income.

Retirement assets, because they can be among the highest taxed assets in any estate, may be good candidates for charitable bequests. There are advantages of leaving your retirement assets to a charity, namely:

  • 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 to 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.

In relation to the technique of bequeathing one’s retirement asset(s), always make sure the beneficiary designations are up to date. Missing or incorrect designations may result in your assets not being distributed as you intend or your charitable beneficiaries may have to wait to take ownership and incur costs due to probate. The rules for 401(k)s and other qualified retirement plans are similar to those for IRAs. If you are married and you want to designate beneficiaries other than your spouse, you may need written consent from your spouse.

Other giving strategies are by using charitable trusts, which 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 may not be for everyone, though. For one, 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, 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.

A little knowledge can go a long way when it comes to successfully managing your finances. When you are confidently in control of your money, you can start enjoying your life instead of just saving for it.

Make sure your money is working as hard as you are.