Tax Advantaged Strategies for Charity Support
How to Maximize Your Tax Benefits While Building a Legacy
We're all familiar with the grand charitable organizations set up by billionaires, like the Bill and Melinda Gates Foundation, which channel vast sums of money into worthwhile causes—and also offer significant tax advantages to their benefactors.
However, you might be surprised to learn that you don't need to make a blockbuster donation to reap both immediate and long-term financial rewards through charitable giving.
Lately, I’ve had the privilege of planning for individuals who wish to give generously during their lifetime and build a lasting legacy. While financially secure, they probably aren’t the multi-millionaires you’d expect. They are average people with an above-average passion for making a difference. I’ve helped create a long-term financial plan for charitable giving that fits in with their personal financial security while maximizing the tax benefits. Here are options that are available to support causes that are close to your heart:
Partnership gifts.
These gifts are made via long-term arrangements between donors and recipient charities or non-profits, usually with income resulting for the donor and an eventual transfer of the principal to the charity at the donor’s death.
Charitable Remainder Trust (CRT)
A CRT can be established with the assistance of an estate planning attorney. It can be structured to provide a beneficiary (i.e., you) with cash flow for a defined number of years, even for life. After the end of the trust term (or your death), the remaining trust principal passes to charity, or in some cases, to a family foundation. You could even name a CRT as the beneficiary of your IRA as part of your estate planning strategy. In fact, some charities and universities will now administer a CRT you create for free if the remaining trust principal is designated for that charity or university’s investment or endowment fund. A charitable lead trust (CLT) makes annual charitable gifts on your behalf, for a set number of years; if structured and executed properly, the trust beneficiaries (i.e., your heirs) can eventually receive the leftover trust assets without having to pay estate or gift taxes on them.1,2
Donor-Advised Fund (DAF)
A DAF has advantages over a family foundation in that there is less bureaucracy. An attorney is unnecessary, and it can be done with a much smaller contribution. Essentially, this is a charitable savings account. You make an irrevocable contribution to a third-party fund, realizing an immediate tax deduction for the year of the gift; the fund invests the money in an account you create, where it grows without being taxed. You can request where the charitable donations from the DAF go, and you have a say in how you want the funds in the DAF invested, but the DAF makes the actual donations to non-profits and has the legal control over these matters.1,4 While establishing a DAF isn’t necessarily difficult, a qualified Tax Advisor should be consulted to maximize the benefit. As a Tax Advisor and a financial planner, I utilize my financial tools to calculate plans with the goal of offering significant tax savings.
Lifetime gifts
These are charitable gifts in which the donor retains no powers or other controls over the gift once it is made. The gift is irrevocable, or in federal tax terms, “complete.” A lifetime gift of this sort is not included in what the Internal Revenue Service calls your Gross Estate (but taxable gifts are used in the calculation of estate tax).5 Lifetime gifts also include outright gifts of cash or appreciated property, such as stocks or real estate. Thanks to the 2017 federal tax reforms, you can make outright gifts via cash or check and deduct such donations up to 60% of your income. A gift of appreciated property could bring you an income tax deduction for its fair market value and help you avoid the capital gains tax that would result from the sale of the asset.6,7 Through a partial or whole gift of appreciated property, you can transfer a real estate deed to a school or charity and get around capital gains taxes that may result from a property’s sale. You may receive an immediate charitable income tax deduction for the full fair market value of the gifted property, a deduction which you may apply up to 30% of your adjusted gross income. You could even arrange a retained life estate, in which you transfer the title to your home to a charity or non-profit while retaining the right to live in it as your primary residence for the rest of your life.8
Life insurance policies and IRAs
Donating a paid-up life insurance policy to a university or charity may allow you an immediate charitable deduction for the value of the gift. You can also name a charity as the beneficiary of an IRA; upon your death, the full value of the account will transfer to the charity without being subject to federal estate or income taxes.6
The caveats
As your income increases, you may face limits on the amounts of charitable gifts you can deduct. Your charitable deductions for any federal tax year cannot be more than 50% of your adjusted gross income. But if you exceed such limits, the I.R.S. lets you carry forward excess contributions for up to five years.9
Would you like to learn more?
Now is as good a time as any to do so. Your charitable gifting can have a real impact even if you don’t have a fortune. Keep in mind that your unique circumstances need to be weighed before making any decision. Please consult your financial professional, tax professional, or attorney prior to making any move.
Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance. She utilizes advanced tools for in-depth calculations that analyze tax and retirement scenarios to help her clients avoid a future tax time-bomb. Whether this means enjoying more of your hard-earned money in retirement or passing along assets to loved ones with less tax burden, planning makes the difference.
Her Amazon best-selling book, The Generational Wealth System outlines a holistic approach to preserving lifestyle, wealth and legacy.
Related Articles: Case Study: Charity Driven Retiree, Strategic Tax Solutions, Transferring Wealth While Living
1 – foundationsource.com/learn-about-foundations/charitable-vehicles/ [9/4/18]
2 – forbes.com/sites/bobcarlson/2018/02/16/how-a-charitable-trust-could-save-your-ira/ [2/16/18]
3 – giftplanning.cmu.edu/how-you-can-give/giving-and-generating-income/pooled-income-fund [9/4/18]
4 – mdmag.com/physicians-money-digest/personal-finance/preserve-tax-deductions-by-using-donor-advised-funds-strategically [6/19/18]
5 – irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes [5/11/18]
6 – accountingweb.com/practice/clients/10-tax-efficient-ways-clients-can-give-to-charity [6/21/18]
7 – nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter9-5.html [9/4/18]
8 – supportuw.org/gift-planning/estate-gifts/assets/real-estate/ [9/4/18]
9 – 20somethingfinance.com/irs-maximum-charitable-donation-limit/ [1/2/18]
