Three Advanced Charitable Giving Strategies
Our clients have been more generous than ever as financial markets have performed so well of late. A recent situation involved a large gift from the proceeds of an estate, while there have been other instances of clients establishing scholarships and long-term gifts to important causes. Charitable giving comes from many sources – retirement accounts, appreciated securities, real estate, or plain cold cash (with a very warm heart).
Making the Most Out of Gifting
It is fantastic and encouraging to witness so many individuals and families with great intentions using their wealth to help others. As a trusted advisor, it is my job to ensure we are making the most of clients’ gifts. When speaking with people looking to give, I stress that we must be proactive about minimizing the tax consequence while supporting our charitable endeavors. The tax code is only getting more complex!
By being tax-savvy about our giving, we free up more money to benefit the client’s dearest causes. Even beyond charity, using the right tax strategies helps your children and grandchildren by growing generational wealth (instead of cutting a bigger than necessary check to Uncle Sam).
- Donating Appreciated Stock Instead of Cash
Case-in-point, one recent client desired to give cash to a charity from an inheritance after the passing of a parent. That’s a thoughtful and honorable wish, but the client also held highly appreciated stock in their name. Instead of giving cash to the charity, we recommended giving the stock with the big gains, then investing the cash into other stock at today's prices.
This nuance might not seem like a big difference, but it eliminates a big piece of the family’s long-term capital gain obligation, especially because the step-up in cost basis tax advantage is likely to go away soon.[i] By structuring the charitable donation this way, the charity gets all of the proceeds since it can sell the stock at market value and will not have to pay capital gains tax. That’s an easy win!
- Stock Replacement Strategy
Another tax-optimization situation came about not long ago. A client wanted to make a large gift while holding a stock they loved. To give you an idea of how important the stock is to this person, they have held it for probably 50 years, and it is up hundreds and hundreds of percent! They don’t want to let it go as it has provided so much for the family. Should I say it again? They LOVE it!
Once again, the stepped-up cost basis at death rule is possibly going away before long, so we must plan for that risk. Here, we can buy the same number of shares of the beloved stock using other assets, then give the highly appreciated shares. Presto – we have eliminated the taxable unrealized gain that had been sitting on the family’s book. That’s more money for the family later!
- Qualified Charitable Distributions (QCDs)
A final situation involves retirement accounts after death. Did you know that one of the most unattractive assets you can bequeath is a pre-tax retirement account? It’s true, but there are strategies we can take today to make it easier and save families considerable money on taxes.
There is an option once you hit age 70 ½ to gift up to $100,000 per year to a qualified charity from these retirement accounts.[ii] With this strategy, we can reduce or eliminate taxable required minimum distributions while giving to charity – it’s known as a Qualified Charitable Distribution. Additionally, it’s much better for heirs to receive appreciated stock (even with the step-up rule gone) than retirement accounts which get taxed as income upon distribution. The current tax law, and any future changes to it, tax income much higher than capital gains for standard income earners.
The Point
We are here to help you navigate through the complexities of taxes to ensure we optimize your assets so that you keep more money for yourself, your family, and the charities you care deeply about! You can also talk it through with a professional you trust; be it your accountant, attorney, or financial advisor.
Thanks for taking a look!
Tom
[i] https://www.kiplinger.com/retirement/estate-planning/602701/biden-hopes-to-eliminate-stepped-up-basis-for-millionaires
[ii] https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals