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Maximize Your Year End Giving: Charitable Planning Strategies for Individuals
As the end of the year approaches, it’s an opportune time for clients to utilize strategies that align charitable goals with their financial objectives. In this article, we will explore various charitable planning opportunities and strategies to leverage to help our clients optimize their giving while improving their overall financial situation.
Tax Efficient Charitable Giving Opportunities
One of the primary incentives for charitable giving is the potential to reduce taxable income. However, timing and method play a crucial role in maximizing these benefits. Below are several techniques to consider as part of year-end planning:
Donating Appreciated Securities: Instead of giving cash, clients can donate appreciated stocks, bonds, or mutual funds directly to a charity. This strategy offers two key benefits:
- Avoiding Capital Gains Tax: Donors avoid paying capital gains tax on the appreciation of the asset.
- Maximized Tax Deduction: They receive a charitable deduction for the fair market value of the donated securities, provided they’ve held the asset for more than one year.
- Watch Your Limits: The IRS places limits on the amount clients can deduct for charitable contributions. For cash donations, the limit is typically 60% of AGI, while donations of appreciated assets are limited to 30% of AGI. If the total contributions exceed these limits, the excess can be carried forward for up to five years.
- Helps Portfolios: This strategy is particularly useful in bull markets, where many clients may have appreciated assets they would otherwise sell to rebalance their portfolios.
Qualified Charitable Distributions (QCDs): Clients aged 70½ or older can make a QCD of up to $105,000 annually (indexed annually to inflation) directly from their IRA to a qualified charity. QCDs offer several advantages:
- Satisfies Required Minimum Distributions (RMDs): For clients who have reached their required beginning date, QCDs can reduce taxable income by offsetting RMDs. However you need to be careful to make QCDs first, before taking any other income yourself. The first dollars out of a qualified account are the RMD dollars; if you take your RMD first and then try to make a QCD later, it won’t count.
- Tax-Free Distribution: Unlike regular withdrawals, the QCD is excluded from the client’s taxable income, offering a substantial benefit for those who don’t itemize deductions, which can help clients stay within lower tax brackets or avoid Medicare premium increases.
- This strategy is particularly advantageous for clients who may no longer need the full amount of their RMD for living expenses but are still required to take it.
Bunching Charitable Contributions with Donor-Advised Funds (DAFs): Since the introduction of higher standard deductions through the Tax Cuts and Jobs Act (TCJA), many clients no longer benefit from itemizing deductions annually. Bunching donations into a single year can help overcome this threshold. Bunching involves concentrating charitable giving into one year to surpass the standard deduction, allowing clients to itemize and maximize their tax savings.
One way to implement this is through a Donor-Advised Fund (DAF):
- Clients can make a lump-sum contribution to a DAF and receive an immediate tax deduction.
- In subsequent years, the client can take the standard deduction and not make additional charitable contributions until the next “bunching” year.
- The funds can be distributed to charities over several years allowing donors to maintain their philanthropic commitments.
- It’s ideal for clients facing a windfall year or who have highly appreciated assets they wish to donate.
- For clients seeking to create a structured giving plan, or for those who may not have specific charities in mind yet, a DAF can serve as a helpful intermediary.
Charitable Trusts: Charitable trusts are powerful tools for individuals looking to balance their philanthropic goals with tax-efficient wealth management. These trusts not only provide a way to support meaningful causes but also offer substantial tax benefits for donors and their heirs.
- Generate Income Streams: Charitable trusts allow donors to convert highly appreciated assets into a steady income. For example, with a Charitable Remainder Trust (CRT), donors or their beneficiaries receive a fixed or variable income for life or a specified period. This can be an attractive option for retirees or clients seeking supplemental income while also supporting charities in the future.
- Grow the Legacy: One of the most significant benefits of charitable trusts is the potential to transfer appreciated assets, such as real estate or stocks, without triggering capital gains taxes. When assets are placed into a Charitable Remainder Trust (CRT) and sold, the proceeds are untaxed to the trust, allowing more principal to be retained for both income generation and charitable legacies.
- Immediate Tax Deduction: Contributions to a charitable trust are eligible for an immediate charitable deduction, based on the present value of the future charitable donation. This deduction can help offset taxable income in the year of the contribution, providing immediate tax relief.
Incorporating Family in Charitable Planning
Holiday gatherings present a unique opportunity to engage family members in philanthropy. Clients can involve their children or grandchildren in charitable discussions to foster shared values and create a lasting legacy of giving.
It’s important to manage expectations on how the family will work together; make it optional, not mandatory, to create the most positive experience possible. You should also honor individuality and allow your children the flexibility to choose the organizations they want to support; involving adult children in the decision-making process is vital, but it will be frustrating to them if they feel like they are only along for the (your) ride.
Charitable giving shouldn’t be compulsory because it immediately becomes an obligation as opposed to enjoyable. Finally, giving small gifts to every organization that asks each year might be easier than saying no, but to truly maximize your legacy, try to create a plan to give to charitable organizations in such a way to create a big change.
Maximizing Impact with Matching Gift Programs: Clients should check if their employers offer matching gift programs, which amplify the impact of charitable donations. Many companies will match employee donations dollar-for-dollar, effectively doubling the contribution. Some corporations also match volunteer hours, allowing clients to combine their time and financial resources for greater impact. Encouraging clients to investigate these programs can result in more strategic giving.
Creating a Year-End Giving Plan with Your Wealth Manager
Your wealth manager can help you formulate a personalized year-end charitable giving plan. Here’s a checklist approach to developing it:
- Identify Charitable Goals: What causes are important to you?
- Review Taxable Income: Determine whether itemizing or taking the standard deduction makes sense.
- Evaluate Assets: Identify appreciated securities or other assets that could be donated.
- Consider Timing: Ensure donations are made before December 31 to qualify for the current tax year.
- Explore Donor-Advised Funds: If clients plan to give over multiple years, DAFs may be an optimal solution.
- Engage Family: Involve family members in the charitable conversation.
- Check Matching Programs: Encourage clients to explore employer matching gift
By using strategies such as donating appreciated securities, leveraging QCDs, or utilizing donor-advised funds, clients can maximize both the impact of their giving and the financial benefits. Incorporating charitable planning into family discussions further deepens the impact while fostering a legacy of philanthropy. As the year draws to a close, now is the perfect time for clients to engage with their Wealth Managers in conversations about their charitable goals and ensure they have a plan in place.
