Many individuals and families find quantitative and qualitative benefits to contributing to non-profit organizations. Although the tax benefits have changed for some taxpayers due to the new tax reform that goes into effect in 2018, charitable contributions will continue to be an area that having appropriate planning will make a significant difference in the efficiency of transactions.
We recently had a client mention in passing that he’s going to write a check to one of his favorite Charites. We asked him a couple more questions, such as the amount of his donation and other goals around his charitable giving. Once we had an idea what he’s looking to accomplish we had a couple ideas for him.
Funding Gifts with Appreciated Securities
By donating highly appreciated investments instead of cash you will avoid paying capital gains tax and potentially be able to deduct the full market value of the appreciated securities. The charity will realize the full market value of the securities, because they don’t have to pay capital gains being that they’re tax exempt.
This strategy can be a great way to rebalance your portfolio, but if your portfolio is not in need of rebalance you can buy the same security back with the cash that you were going to donate. This effectively, resets your basis to current values without the impact of taxes paid on the realized gains.
Establish a Donor-Advised Fund
A donor advised fund is a charitable account that is held by a trust company (Fidelity Charitable). The benefit is that you get a tax deduction in the year you contribute to the account and it can grow as you invest the funds. You get increased flexibility because you can decide the amount, the timing, and the organizations you wish to support in future years after the initial contribution to the donor advised fund.
Fund Gifts with a Qualified Charitable Distribution from your IRA
If you are over 70 ½ years old, you can lower your taxable income by directing your IRA withdrawals directly to a charity. To do a Qualified Charitable Distributions (QCD), you must meet the age requirement. These transactions reduce income, but you also do not receive a charitable deduction. In essence, the transaction is ignored on your tax return.
Set Up a Charitable Trust
If you own highly appreciated investments that you are willing to dedicate to charity, you can work directly with certain charities to set up a charitable trust such as a Charitable Remainder Annuity Trust, Charitable Remainder Uni-Trust or a Charitable Lead Trust. You can receive a charitable deduction for transferring the asset to the charity, while still receiving an income stream for life. These trusts are more complex and the mechanics of the transaction are negotiated with the charitable organization and their advisors. These types of transactions typically occur with larger charitable organizations.
If you and your family are charitably inclined, appropriate planning and strategies can significantly increase the efficiency of your contributions. Planning ahead to avoid cash or check donations to charities will help improve the overall efficiency of your financial plan. Please reach out to us if you have questions.
By: Brady Mickolichek
Associate Wealth Manager