Dec
8
In my previous blog, A Tale of Two Cities: How Philanthropy Can Bridge the Gaps, I discussed the difference between philanthropy and charitable giving and how the two go hand in hand. This post is a continuation of the first, where I’ll focus on charitable giving strategies you can utilize to carry out a philanthropic plan.
We will continue to post estate, gift and income tax law updates, and you can read more on these topics by going to my colleague, Steve Novak’s, post titled, Getting (Closer) to Yes.
Below are a few of the more common examples of charitable giving strategies, their benefits, and the tools used to support various objectives. This list is not meant to be all-inclusive, and you will need to work with your tax professional to navigate the ever-changing tax laws and how these apply to you:
1. Direct gifts to public 501(c)(3) charities
A. Non-financial gifts – the giving of your time and talents by volunteering to serve others.
B. Financial gifts during your lifetime
i. Cash gifts (via hard cash, check, wire, or credit card)
1. The amount you can deduct from your income taxes depends on whether you use the standard deduction or itemized deductions.
2. If you use the standard deduction, you can deduct up to $300 of cash donations ($600 for married filing jointly).
3. If you itemize deductions, you generally can deduct up to 100% of your Adjusted Gross Income (AGI) through 2021 – formerly 60% prior to the March 2020 CARES Act (Coronavirus Aid, Relief and Economic Security Act) if giving to a qualified organization. This doesn’t apply for donations to a Donor-Advised Fund (discussed below).
4.Remember to keep receipts for your contributions.
ii. Non-cash gifts
1.In the form of securities, property, vehicles, collectibles or art, and an appraisal may be required to determine the fair market value.
2.This can be a wise choice when you have appreciated assets (avoids the capital gains tax).
3.If you itemize deductions, you generally can deduct up to 30% of your AGI if you owned the asset for more than one year (a capital gain asset).
iii. Traditional IRAs & Qualified Charitable Distribution (QCD) gifts
1. If you don’t need the required minimum distribution amount from your traditional IRA, you can direct part or all of the distribution up to $100,000 per year to a qualified charity or charities and remove the amount gifted from your taxable income.
2. You can’t double dip and get a charitable deduction. However, what would have been taxed as ordinary income to you is removed and now benefits the charity.
3. This option is available to you even if you don’t itemize deductions.
4. The required minimum distribution age is 72 under the CARES Act, but you can still make QCD gifts beginning at age 70 1/2.
C. Financial gifts at death – you receive an unlimited estate tax deduction for charitable gifts if needed
i. By beneficiary designation from your IRA, qualified retirement plan, or life insurance policy as examples
ii. By will or living trust as outlined in the legal documents
2. Gifts through a charitable fund or entity – funded either during your lifetime or at death
A. Donor-Advised Funds (DAFs)
i. Since 1931, DAFs have been offered by local community foundations. Recently, more have become available through broker-sponsored charitable gift funds.
ii. In general, a DAF is a separate account that is operated by a sponsoring organization (such as Charles Schwab or Fidelity). Each account is made of contributions given by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor will retain all the advisory privileges, meaning the donor can advise on the charities and the amounts to be gifted from a DAF.
iii. A DAF can be named by beneficiary designation, but it may not receive a Qualified Charitable Distribution gift (a direct charitable contribution from your IRA, as described above).
iv. You generally can deduct up to 60% of your AGI for cash contributions and 30% of AGI if gifting appreciated assets. Charitable gifts made at death receive an unlimited estate tax deduction, if needed.
v. DAFs might be considered one of the easiest, lowest-cost options to set up—second to direct gifts mentioned above.
B. Community Foundations – funded primarily by the public
i. A community foundation is a public charity that typically focuses on supporting a geographical area, primarily by facilitating and pooling donations used to address community needs and support local nonprofits.
ii. Community foundations offer numerous types of grantmaking programs, frequently including donor-advised funds, endowments, scholarships, field-of interest funds, giving circles and more.
iii. Community foundations are funded by donations from individuals, families, businesses and sometimes government grants.
iv. You generally can deduct up to 60% of your AGI for cash contributions and 30% of AGI if gifting appreciated assets. Charitable gifts made at death receive an unlimited estate tax deduction if needed.
C. Charitable Trusts – strategies used when you want to support charities as well as your family
i. Charitable Remainder Trusts
1. Provide a steady stream of income for you or your heirs first.
2. Enable you or your estate to claim an estate tax deduction if needed for the assets expected to go to charity at the termination of the trust.
3. The “remainder interest” at the termination of the trust funds your desired charities at the end of the trust term. In addition to gifting directly to qualified charitable organizations, you could include a donor-advised fund as a beneficiary of a charitable remainder trust.
4. The type of charitable remainder trust will determine how the income stream is calculated. The trust can be designed to either pay you or your family a set amount each year or a percentage of the assets each year.
ii. Charitable Lead Trusts
1. Provide a steady stream of income to your named charities first.
2. The “remainder interest” is distributed to your heirs.
3. The type of charitable lead trust will determine how the income stream is calculated.
4. You may receive a charitable income tax deduction equal to the present value of the income stream that goes to charity.
iii. You generally can deduct up to 60% of your AGI for cash contributions and 30% of AGI if gifting appreciated assets. The charitable portion of gifts made at death receive an unlimited estate tax deduction if needed.
D. Private Foundations – funded with private, family funds
i. A private foundation is a type of charitable organization that is typically established by an individual, family, or corporation to support charitable activities.
ii. A board of directors or trustees oversees a private foundation and is responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations. It is also responsible for filing tax returns and other administrative reporting requirements.
iii. With a private foundation, the board has full control over the grants made to charities, and the family’s next generations can serve on the board to carry on the family legacy.
iv. Grants can be made from the private foundation to DAFs.
v. Private foundations are subject to minimum distribution rules (generally 5% of the assets each year), administrative costs and an excise tax in exchange for more control and flexibility.
vi. You generally can deduct up to 30% of your AGI for cash contributions and 20% of AGI if gifting appreciated assets. Under certain conditions, you may be able to deduct more depending on the type of foundation. Charitable gifts made at death receive an unlimited estate tax deduction, if needed.
3. Extensions from the CARES Act: Individual taxpayers can continue to carry forward any excess charitable contributions for five years, but the enhanced 100 percent deduction limitation expires after 2021.
4. In 2021, if you own a business, corporations may continue to deduct charitable gifts up to 25 percent of the corporation’s taxable income (increased from 10 percent).
5. Go to https://www.irs.gov/pub/irs-pdf/p526.pdf for more details from the IRS.
Please contact us if you would like to learn more about these various options to develop your philanthropic goals and the various charitable giving options to help you meet those goals. Our team at RGT Wealth Advisors welcomes the opportunity to meet with you and your family to discuss how we can serve you and your financial and philanthropic objectives, and help you navigate the many nuances of the strategies discussed above