By Richard Ward, CFP
You may be a regular, committed supporter of an organization, doing your best to be generous in your gifts to help achieve the organization’s mission. But it’s not always easy – or wise – to simply write a check when your cause needs your help. Are you aware there are other ways to complete your philanthropic plans without writing a check? And are you aware that some of them may be even more effective in reducing your tax obligations (consult your CPA or tax advisor) than contributing a cash donation? Here are a few ideas to consider in your future charitable gift giving:
The “Charitable IRA”
Many people hold investment assets in Individual Retirement Accounts (IRAs), and IRA Rollovers, wherein prior employer retirement plan assets have been “rolled over” to the IRA, leaving the employer plan behind (usually at separation of service from a prior employer). When the IRA account owner reaches 70 ½ years old, he or she is required to take what are called “Required Minimum Distributions” (RMDs). These distributions (which are calculated by IRS formula) are taxable to the owner as ordinary income in the year received.
In this approach, those at least 70 ½ years old may contribute such RMD payments directly to a public charity, up to $100,000 annually, without reporting this income on their personal tax return. This may be more tax effective than receiving and reporting the income before contributing the same dollars (writing a check) to the public charity and deducting the contributions on the owner’s tax return.
Donating Appreciated Securities
Many people personally own investments, including appreciated stock or mutual fund shares. The sale of appreciated property, even when used to make cash gifts to charities generates a taxable gain. Instead of contributing cash to the organization, the owner could directly gift their most highly appreciated securities while avoiding capital gains recognition and still receiving an income tax deduction up to the full fair market value of the donated securities. With this approach, the cash that would have otherwise been transferred to a charity could be used to replace the gifted securities. This strategy both avoids the capital gains tax and
maintains your investment strategy, while providing a new, higher cost basis in the replaced securities.
Creating a Charitable Trust
Charitable Trusts are complex instruments designed to provide tax efficient charitable transfers. These types of trust permit the creator to contribute investment income from securities or real estate to favored charities for a number of years while retaining the investment property for the owner/donor or his or her family members. Another alternative with a charitable trust is to retain investment income streams for the benefit of the trust’s creator for a period of years while leaving the underlying asset to a favored charity. These approaches, if structured properly, can allow the trust’s creator to diversify assets and recognize a charitable deduction from the multi-year gifts in the year that the trust is initially created and funded. You should consult your tax or trust attorney to decide if a charitable trust makes sense for you.
These methods of supporting one’s favorite charitable causes can help to reduce taxes while continuing to serve the family’s financial goals and needs. For most effective use, consulting with your financial advisor, tax advisor, and attorney is important.
Richard Ward is a CERTIFIED FINANCIAL PLANNER™ with a passion for helping people find their purpose in life. Richard believes that the secret to living life well and leaving a lasting legacy is found by making contributions in our communities that help others prosper.