Year-End Charitable Giving Strategies

As the end of another year approaches, most altruist investors are considering their year-end charitable giving. When focusing on the goal of bestowing a meaningful gift to another person or charity, some careful planning can go a long way to ensure the maximum amount goes to the intended recipient. This planning should take place on two levels:

1. Determining the means of giving (what to give)
2. Deciding on the method of giving (how to give)

Both aspects should be considered when devising your plan.

Cash

Gifting cash is the fastest and easiest way to give. It is straightforward and simple for both the donor and the recipient and in many cases can be completed as a one-time or recurring gift. Most charities also allow you to give online via a credit card in mere minutes. One problem with donating cash is that with the passage of the 2018 Tax Cuts and Jobs Act and the doubling of the standard deduction, less households can itemize and take advantage of the tax benefits associated with their charitable gifts. Depending on your filing status and age, the 2023 deduction ranges from $13,850 for a single filer under age 65 to $30,700 for joint filers over the age of 65. Consequently, if your total deductions (including charitable contributions) fall below this threshold in a given tax year, contributing cash will not result in any federal tax savings.

Appreciated Securities

A favored gift among savvy donors, appreciated securities such as stocks, bonds or mutual funds are easy to value and can offer significant tax savings. In many cases, they can be easily transferred, and you could save on both capital gains taxes and income taxes, allowing your donation to stretch further than if you sold the security, paid the taxes, and sent the remaining amount to the charity. The potential downside is that some individuals or organizations may not be equipped to easily receive the donation and the assistance of a third party may be required. Contact your intended charity to confirm they accept appreciated securities and for instructions on how to complete the donation.

Qualified Charitable Distributions (QCDs)

People 70 ½ and older can donate funds directly from pre-tax retirement accounts, such as IRAs and 401(k) plans. These gifts are commonly referred to as Qualified Charitable Distributions, or QCDs.

When individuals reach 73 years old, the Internal Revenue Agency (IRS) requires you to start making withdrawals from your pre-tax retirement accounts. The minimum amount you are required to withdraw each year is called your Required Minimum Distribution (RMD). Every dollar that is withdrawn from a pre-tax retirement account is considered ordinary, taxable income.

By gifting directly from pre-tax retirement accounts, your donation (up to a maximum of $100,000 annually) can count towards “withdrawing” your RMD for the year and reduce both your Adjusted Gross Income (AGI) and taxable ordinary income. This holds significance as your AGI plays a role in various other tax computations. Lowering your AGI can lead to a reduction in Social Security taxes and Medicare premiums, as well as improved eligibility for other specific tax credits.

Charitable Gift Bunching

If you have a yearly giving pattern and your itemized deductions do not quite exceed the standard deduction, consolidating, or bunching, your contributions into a single year can be advantageous. For instance, if you typically donate $15,000 annually, you might consider giving $30,000 in one year and nothing the next. This approach allows you to itemize in the year of the $30,000 donation and take the standard deduction in the subsequent year. Even if you itemize, bunching your contributions can enhance your total deductions over multiple years if your itemizations do not surpass the standard deduction by the amount of your charitable gifts.

Donor Advised Fund (DAF)

If you want to take advantage of the bunching strategy but prefer not to contribute the entire amount all at once to a specific organization, opting for a Donor Advised Fund, or DAF, could be a suitable solution.

A DAF is an account to which investments can be contributed or transferred and all the assets go to charity. Your contributions, whether cash or securities, qualify for an income tax deduction for the amount you contribute during the year.

Cash or investments you contribute to the fund can be self-directed or managed and invested by a qualified sponsoring organization. Your contributions can grow tax-free, and over time you can recommend specific gifts, or grants, from your fund to qualifying charities. You choose which organizations you would like to support and when those donations should be distributed.

Keep in mind that donations to a DAF are irrevocable. This means that once you contribute assets, you are not able to withdraw and use them for a different purpose. They must be donated in support of a qualifying 501(c)(3) charity.

Charitable Trusts

Should you have substantial assets that you wish to donate or contribute while alive, it may be worth exploring various charitable trusts or foundation options available to you. Charitable Lead Trusts and Charitable Remainder Trusts are examples of irrevocable trusts that can be established and funded with a variety of assets to benefit intended and specific charitable organizations.

A Charitable Lead Trust receives assets and distributes a set amount of income for a set number of years to a designated charity. At the end of the term, the remaining assets are distributed to designated beneficiaries, usually loved ones.

A Charitable Remainder Trust accomplishes the same planning goals, but in reverse order. Your beneficiaries received a set amount of income for a set number of years. Upon the completion of the term, the remaining assets are distributed to a previously specified charity.

These charitable trust vehicles are less common but in the case of sizable charitable intentions and unique individual needs, can be effective in obtaining income tax, gift tax, and estate tax efficiency. Given the complexity, it is important to engage your financial planner to assess how this strategy will align with your other financial objectives.

Private Foundation

A private foundation is set up by an individual or family for the purpose of accomplishing the family’s philanthropic goals through grants and other gifts. They are funded with a variety of assets, including, but not limited to, cash, securities, life insurance, real estate, businesses, and other personal property. In many cases, foundations extend beyond the lifetimes of the original donors and are best suited for families wishing to leave substantial charitable legacies while maintaining significant control over the distribution of donated assets. Due to regulatory complexity, private foundations may require significant time and administrative efforts.