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Charitable gifting strategies


Charitable gifting can be a very important topic for many families. On top of the positive impact it can have, it can also provide tax and estate planning benefits.

Let’s run through some of the common charitable gifting strategies and tax/estate planning benefits involved:

Gifting cash/financial assets:

    • Can provide an income tax deduction equal to the fair market value of the gift and reduce the size of your taxable estate. The size of the income tax benefit can depend on IRS rules.
    • Donating appreciated stock/other securities can provide an opportunity to avoid capital gains tax.
    • Gifting IRA or 401(k) assets can provide a tax-free benefit to you while the charity or nonprofit avoids income tax as well. Often, this is a good strategy due to beneficiaries incurring tax liability on inherited IRAs and 401(k)s.

Donor-advised funds:

    • You make an irrevocable gift in cash or securities to the fund and then work with the fund to provide donations to organizations that matter to you. The fund is maintained and operated by a qualifying sponsoring organization.
    • You can take an immediate tax deduction on the entire amount you contribute to the fund, independent of when the funds are dispersed to organizations.
    • Given current tax law, cash contributions are eligible for a deduction of up to 60% of your adjusted gross income. Contributions of securities are eligible for a deduction of up to 30% of your adjusted gross income.
    • You can contribute almost any type of asset.
    • Assets in a DAF are usually managed by an investment firm.
    • The contributions are irrevocable when made. This means they are no longer the donor’s assets.

Qualified charitable distributions (QCDS):

    • A QCD is a distribution from an IRA directly to a qualifying charity. This distribution is tax-free to both you and the charity.
    • You must be age 70.5 or older to make a QCD.
    • QCDs count toward your required minimum distribution (RMD).

Charitable gift annuities:

    • You donate a lump-sum to a 501(c)(3) qualified public charity while receiving payouts on a fixed schedule for the remainder of your lifetime.
    • Upon your passing, the charity keeps any remaining funds.
    • The up-front donation can qualify for a partial tax deduction.

Charitable lead trusts:

    • The grantor makes a contribution to fund the trust, which is set up to operate for a fixed term.
    • Payments from the trust are disbursed to selected charities as either a fixed annuity payment or a percentage of assets in the trust.
    • At the end of the trust term, the remaining assets are distributed to non-charitable beneficiaries such as family members.
    • You can contribute cash, publicly traded securities, real estate, some types of closely held stock, and certain other complex assets.
    • Unlike a charitable remainder trust, a charitable lead trust is not tax-exempt. Trust income is taxed like income of any other grantor trust.
    • The key tax benefits include reducing estate taxes and reducing gift taxes. This is often a mechanism used for high-net-worth families with estate tax considerations.

Charitable remainder trust:

    • These work the opposite way of a charitable lead trust.
    • A charitable remainder trust provides income to the grantor or beneficiaries of the trust for a set number of years. At the end of the term, the remainder of the trust assets pass to the designated charities.
    • As with charitable lead trusts, payments from the charitable remainder trust are disbursed as either a fixed annuity payment or a percentage of assets in the trust. Charitable remainder annuity trusts distribute fixed income streams each year. Charitable remainder unitrusts distribute a fixed percentage of the trust balance each year.
    • Contributions to the trust are eligible for a partial tax deduction and can reduce estate taxes as well.
Together, we can work to keep you on-track towards your financial goals. Request a consultation with me to learn more.
 

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