Strategic charitable giving not only benefits the recipient but can also create significant tax advantages for the giver. While many people approach their financial planning with careful strategy, it’s easy to overlook the same level of intention when it comes to charitable giving.
Let’s explore several potentially effective financial planning tools that may help you maximize your impact and meet your philanthropic goals.
Give with a Donor-Advised Fund
A donor-advised fund (DAF) can be a powerful financial planning tool for charitable giving that offers you some measure of control as to how and when the donation will be made. You can deposit money into the account now, receive the tax benefit, and then make the donation in your own time.
There’s no time limit on when you need to make the donation. It just needs to be given to a qualified 501(c)(3). For example, you can deposit $100,000 now, receive the tax benefit, and then donate $10,000 a year over the next decade. The tax benefit will come to you up front, the money can grow in the fund, and you won’t be hit with capital gains on its way out.
One of the goals of financial planning is to give you control over your finances, rather than just reacting to what happens. This is where the “time-travel” element of a DAF can be especially helpful. You could place the money in the account now and let it grow, then make a charitable decision as a family over the holidays. Or, if you have a “windfall year,” with an inheritance or business sale, you can put money in a DAF to reduce your tax footprint for the year.
Highly appreciated stock is another possibility to deposit into your DAF. The capital gains tax losses on this kind of appreciation — think company stock from a 30-year career — can be painful. You can move these large stock holdings to a DAF, get the tax break, and then use the money to make donations every year through your retirement.
Donate Your Required Minimum Distributions
If you’re 73 or older, required minimum distributions (RMDs) are kicking in. These mandatory distributions from your before tax retirement accounts are essentially a tax vehicle — the government didn’t get any taxes when you contributed, so they will get them when you withdraw. Your tax footprint for the year can grow substantially, depending on the size of your retirement accounts.
One of the most underused financial planning tools for charitable giving is connecting your RMD to a qualified charitable donation (QCD). You can transfer this mandatory withdrawal directly to a qualified charity and avoid the tax loss to yourself or to the charitable recipient. One of the best ways to use this technique is with the giving you’re already doing.
To better illustrate how this can work, let’s look at a hypothetical example:
Gladys just turned 73 and has been talking with her advisor about her upcoming RMDs, which come out at about $70,000 per year. She has faithfully given $50,000 annually to the United Way for most of her working life as a personal goal. To give that much, Gladys has always had to take out well over that amount from her other accounts because of the tax loss involved. With the RMD to QCD connection, she can transfer the full $50,000 without incurring taxes on the transfer.
Give Through Your Estate Plan
When people sit down to work out their estate plan, I often start the conversation with a tongue-in-cheek question. There are three choices as to where your money will end up: with your benefactors, charity or the U.S. government. Which do you choose?
I’ll let you guess which two are the most popular!
Estate taxes can be an irritating reality when it comes to leaving a legacy, and planning can be vitally important. The sad story of a famed musical performer, Prince, who left almost half his fortune to taxes can be a cautionary tale. Thinking ahead of time can help you avoid the tax loss for your loved ones and the causes you hold dear.
An irrevocable trust can be a great estate planning technique that helps you avoid tax losses when the money is passed on and take a tax benefit now. More money will go to your benefactors and/or charities, and less will go to the government. Setting up a family charitable foundation offers similar benefits, and lets your loved ones choose where the donated funds will go and on what timeline.
Another important maneuver you can make is converting your traditional IRA to a Roth IRA account. When converted, the money is no longer taxable no matter the growth. You will incur taxes in the conversion process, but you can pay them before it becomes an issue for benefactors or charities.
Talk to Your Financial Advisor About how to Give Effectively
Whether you’re exploring a donor-advised fund, making a qualified charitable donation, or setting up an estate plan, aligning your charitable giving strategy with your overall financial plan can help you make a greater impact. A financial advisor can guide you in selecting the tools that best fit your goals, allowing you to give more effectively and intentionally.
Take the time to approach charitable giving with the same thoughtfulness you apply to the rest of your financial planning. The rewards — for both you and the causes you care about — can be well worth the effort.
Scott Berryman is a non-registered affiliate of Cetera Advisor Networks, LLC.
Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
Converting from a traditional IRA to a Roth IRA is a taxable event.
The individuals and situations depicted here are hypothetical only, and do not represent actual individuals, any similarities to actual persons is purely coincidental. Charitable Remainder Trusts Such trusts are used to develop a vehicle for donations to a favorite charity, which also allows for the reduction of income taxes through a charitable deduction and favorable tax treatment at the date of the gift by non-recognition of built-in capital gains. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
