As the end of the year approaches, charitable giving becomes top of mind for many individuals and families—hopefully you’re among them. Whether driven by a desire to maximize tax incentives, honor a loved one, or thoughtfully allocate year-end bonuses, this season is a strategic time for philanthropy. For those with significant resources, charitable giving is not only a means of giving back but also a critical component of comprehensive wealth management and tax planning.
Giving often requires careful planning and involves more advanced strategies to make a meaningful impact. Your financial advisor can help you put your giving options in perspective as they fit with your overall financial plans and charity goals.
Charitable Giving’s Role
Charitable giving provides an opportunity for high-net-worth (HNW) individuals and families to make a meaningful impact while benefiting from potential tax incentives. However, the primary motivation often transcends financial benefits, focusing instead on personal values, legacy building, and making a tangible difference in society. This approach to philanthropy is increasingly important among younger people who are also starting to view charitable giving as integral to their financial strategies.
A recent study revealed that 90% of wealthy investors agree that philanthropy should be woven into their financial planning. With younger generations increasingly prioritizing giving—especially Gen X and Millennial investors—a well-planned strategy becomes even more crucial. Some investors even consider the tax benefits from giving to be secondary to the personal satisfaction derived from philanthropy.
Giving Options
You have several sophisticated giving options that can maximize your contributions while offering potential tax benefits. Here are four popular strategies:
1. Private Foundations
These entities allow donors to maintain control over donated assets and make grants over time. They provide significant estate and income tax benefits, making them ideal for those looking to establish a lasting philanthropic legacy. Founders maintain control over assets and grant-making, with foundations required to distribute at least 5% of assets annually. Private foundations offer several estate and income tax benefits, including these two:
- Cash gifts to the foundation can be deducted up to 30% of the donor’s adjusted gross income (AGI). For stock or real estate donations, the number is 20% of AGI. The benefit of contributing stock is that you get a deduction of the full market value of the stock, but you don’t pay tax on the gain.
- Contributions to a foundation upon a donor’s death are estate tax-free.
Foundations are ideal for philanthropists who want to create a legacy, set long-term giving goals, and involve family members in charitable decisions.
2. Donor-Advised Funds (DAFs)
DAFs are flexible charitable giving accounts managed by sponsoring organizations. Donors can advise on investments and distributions while benefiting from an immediate tax deduction. This is up to 60% of AGI for cash gifts and up to 20% of AGI for appreciated stock donated. The assets in a DAF grow tax-free, and donors can contribute cash or securities. DAFs are especially useful for “bunching” charitable donations into a single tax year while spreading grants over time.
3. Charitable Trusts
Charitable trusts come in two main forms:
- Charitable Lead Trusts (CLTs): Provide income to charities for a set period, with remaining assets going to beneficiaries. These trusts are effective for transferring wealth while supporting charitable causes.
- Charitable Remainder Trusts (CRTs): Allow donors to receive an income stream for life or a term of years, with the remainder going to a charity. Donors can receive an income tax deduction based on the future value of the gift and potentially bypass estate taxes.
Both trust types are irrevocable and offer a way to balance philanthropy with family wealth planning.
4. Donating Appreciated Stocks
Donors can save on capital gains taxes and receive an income tax deduction by donating appreciated securities. This strategy allows charities to benefit from the full value of the gift, tax-free. It’s a win-win approach that enhances the impact of the donation.
Strategic Year-End Giving Ideas
To maximize philanthropic impact before year-end, consider these strategies:
1. Extended Giving
Bunching multiple years of charitable contributions into one year allows donors to maximize itemized deductions. Using a DAF facilitates this, providing immediate tax benefits and the flexibility to allocate grants over future years.
2. Tax-Loss Harvesting
Given market volatility, selling underperforming stocks to offset gains and up to $3,000 of ordinary income could be a smart year-end strategy. Donating proceeds from tax-loss harvesting adds another layer of tax efficiency.
3. Qualified Charitable Distributions (QCDs)
For those aged 70½ or older, QCDs are a way to make up to $100,000 in tax-free donations annually from an IRA to qualifying charities. This approach can reduce taxable income and count toward required minimum distributions (RMDs).
The Takeaway
Now is the time of year to focus on your plans for charitable giving. You can benefit the causes and institutions you care about most, while taking an active role in minimizing taxation. Of course, tax rules and charity-giving methods can be complex, and any moves you make should not put your overall financial planning out of kilter. That’s why it’s always wise to get advice on year-end decisions from your financial advisor and, ideally, your tax professional as well.
Source: Year-End Charitable Giving Strategies to Consider: Charitable planning should be integrated into overall wealth management; Copyright © 2024 FMeX. All rights reserved. Distributed by Financial Media Exchange.
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