At Meath Wealth Advisors, it’s ingrained in our firm’s culture to serve others.
We strive to make a difference in people’s lives – and it inspires the work we do for our clients. As part of our planning process, we want to make sure you also have the ideas and information to help you support the causes you care about.
Do you have a specific charity you are passionate about? There are ways to structure your giving to benefit the causes you care about, in a tax efficient way. Does a donor advise fund, qualified charitable distribution, charitable remainder trust, or private family foundation make sense? We will help you evaluate these decisions as part of your overall wealth plan. Strategic philanthropic giving may strengthen your financial plan while still serving the charities you care the most about.
Expand Your Charitable Reach
As a kid, Zachary Conway’s financial advisor father tried to instill good savings and charitable habits..
As a kid, Zachary Conway’s financial advisor father tried to instill good savings and charitable habits.
Conway, founder and CEO of Seeds Investor, recently told the Framework podcast team about how that worked. When he got his monthly allowance, he divided it up among several containers: one for savings, one for spending and and one for charity.
This is an example of how being charitably minded might start when we are kids, stashing away money in a container to give to charity. But it could also happen later in life when we find a cause we are passionate about.
Utilizing retirement and appreciated assets can help make charitable giving more accessible to more people. Oftentimes, you might not have the option to cut a big, fat check from your bank account to your favorite charity, but most people have retirement assets or appreciated assets they can utilize.
Most people give to charity for altruistic reasons, rather than for the tax benefits. However, the tax benefits could be advantageous. You can utilize your assets in a tax-efficient way to make the impact you want to make, and this article will provide you with a few tools to do that.
The extraordinary year that was 2020 – which was dominated by the still-ongoing global COVID-19 pandemic and civil unrest – didn’t slow down charitable giving for affluent families. Bank of America reported that nearly 90% of affluent households maintained their charitable giving patterns in 2020.
We’ll go over a few strategies to utilize your assets for charitable giving, including donor-advised funds, qualified charitable distributions and gifting appreciated stock.
A donor-advised fund (DAF) can help you maximize your charitable giving. It’s sponsored by a 501(c)(3) nonprofit organization, which subsequently owns the assets and handles all the administrative tasks and the grant administration process. They also ultimately have final say in where the money goes, because the grant must go to a qualified charitable organization; however, you can initially make recommendations.
This is how it works: you make an irrevocable contribution to the DAF of either cash or other assets, like appreciated securities, and then you can claim the tax deduction the year you contribute assets to the DAF.
Say, for example, you usually donate $2,500 a month to charity ($30,000 per year) – you can donate five years’ worth of your donations to the DAF ($150,000) and get the tax deduction for the year that you donate.
Note that while you get a tax deduction at the time of the original donation to the DAF, you cannot deduct the amount again when the money is distributed from the DAF to the qualified charity.
Going back to our example, the DAF would disburse that $2,500 a month to charity, but you’ll get the deduction for the five years’ worth of donations now, versus the $30,000 deduction each year over the five years, which might actually be more valuable to you.
Qualified Charitable Distributions
An often overlooked source of funds to contribute to charity is your IRA. A qualified charitable distribution is a rollover from your IRA that, instead of being taken as a required minimum distribution, you basically roll over to a charity of your choice.
If you are in a position to not need your required minimum withdrawals for living expenses, you can donate them to make an impact while also getting a tax benefit. If you’re already in retirement and subject to required minimum withdrawals, you can take your withdrawal – up to $100,000 – from your IRA and donate it directly to a charity.
If you are married, each spouse can make a QCD, so potentially you can donate up to $200,000 to your favorite charitable causes and you won’t have to pay taxes on the amount you gave to the charity from your IRA.
This essentially functions as an above-the-line deduction and a dollar-for-dollar reduction in income.
To Keep in Mind: Charitable Remainder Trusts
The disclaimer with charitable remainder trusts is that you might need to wait until next year to reap the tax benefits from a CRT.
It’s difficult this time of year because when you’re dealing with a trust, you have to get that trust document drafted by an estate planning attorney, and the timing to do that might make it so you’re not able to do it by the end of the year.
But since you’re going to keep it in mind, know that a CRT is an irrevocable trust that is established to provide annual payments to current beneficiaries (this could be you) with the remainder of the balance at the end of its term transferred to charity.
Here’s how it works: Your attorney creates the CRT, and then you, the attorney and your financial advisor determine the asset you’re going to put into it and the current and remainder payout parameters. You can choose between a Charitable Remainder Unitrust (CRUT), which distributes a fixed amount each year, but no additional contributions can be made; or a Charitable Remainder Annuity Trust (CRAT), which distributes a fixed percentage on the balance of trust assets, but additional contributions can be made.
Note the CRT parameters, however, namely that they have an endpoint and there is a mandatory amount or percentage of the trust assets that has to come out (5% of trust assets, but not more than 50%, and the charity has to receive at least 10% of the actuarial value of the assets initially transferred to the CRT at the end of its term).
Donating Appreciated Stock
Another tool to use is donating appreciated publicly traded stock instead of cash to your favorite charities – so long as they accept stock.
There is a trifecta of tax benefits when you donate appreciated stock: You can get a deduction for the fair market value of the stock at the date of the gift, the donor avoids paying capital gains on the stock and the charity doesn’t pay taxes on the gift.
Keep in mind that stock gifts can only be up to 30% of your adjusted gross income, whereas if you were to donate cash, you’d be able to donate up to 60% of your adjusted gross income.
Even though most people give to charity because they want to support causes they care about, you can do so in a way that also benefits you.
Hopefully this article will give you some information to talk over with your financial professional, who can help you make the right charitable giving decisions for your situation.
This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.