Key Takeaways
Gift appreciated stock instead of cash to avoid capital gains taxes.
Use Qualified Charitable Distributions from IRAs for tax-efficient giving if over 70½.
Donor Advised Funds offer a simple way to give to multiple charities without writing multiple checks and administrative issues.
For larger donations, consider setting up a private foundation or charitable trust. These offer more control and potential family involvement in philanthropic efforts.
Year-end will be here before you know it. Holiday plans and family gatherings are already in motion, but year-end financial planning -- including charitable giving -- often gets lost in the shuffle. That’s why we meet with our clients at the beginning of each year so we can get their cash flow and charitable giving plans in place and avoid the year-end scramble. If charitable giving is important to you and you don’t have a specific plan in place, there is still time to do some tax-advantaged giving in 2024. However, you need to get moving so you don’t miss out on the financial benefits of supporting the causes and organizations closest to you.
Gift Appreciated Stock Instead Of Cash
For starters, it’s almost always better to gift appreciated stock instead of cash. Especially for people who are retired, you don’t want to sell appreciated stock from your brokerage account just to raise cash to give to your favorite charities. If you do, you’ll incur capital gains taxes. Instead, you can gift the appreciated shares directly to the charity of your choice. This allows you to avoid realizing capital gains and still receive a valuable charitable deduction.
Qualified Charitable Distributions
If you’re older than age 70-1/2 and have a traditional IRA, you can write checks from your IRA directly to charities you support. That’s called a qualified charitable distribution (QCD). Unlike normal distributions from your traditional IRA, a QCD is not taxed. However, if you take the money as a regular IRA distribution first -- and then use that cash to give to charity -- you’ll end up paying income taxes unnecessarily on that distribution.
Donor-Advised Funds vs. Private Foundations
If you’re thinking about being more strategic with your yearly charitable donations and want to turn your giving into a legacy, you can establish a donor advised fund (DAF) or a private foundation. Either way, you don’t have to be a billionaire to make a big impact with your giving.
A Donor Advised Fund (DAF) is a charitable investment account. Here is an overview of how they work. When you establish a DAF you can contribute cash, investments, and/or other types of assets to the account. These charitable contributions are eligible for an immediate charitable tax deduction. Once the money is contributed to your DAF, you no longer “own” it. It is out of your estate.
However, you still retain control over how the money is invested and you can designate when and where the money eventually goes. Let’s say you like to give $1,000 a year to seven different charities. Many charities don’t have large staffs, so it can be administratively burdensome for you to donate individual stock every year to seven different charities. But if you set up a DAF, you can contribute $7,000 in appreciated stock to a single account, your DAF. Then you can distribute seven grants of $1,000 each from your DAF to the charities you choose. The donations must go to public charities (501c(3)), but you have the option of setting up the DAF to make your giving anonymous. DAFs are a great solution to make the administration of charitable giving simple and if you choose, private.
Real world example
DAF’s can also work if you have valuable physical assets that you wish to gift to charity. A retired couple we worked with was downsizing and they had a room full of vintage antique furniture that none of their children wanted. The furniture was too valuable to throw away, but they didn’t want the hassle of trying to sell it to strangers or through an auction since they had no experience with either process. By working through their DAF, they were able to make arrangements with private sellers of collectibles to facilitate the sale of the furniture. The proceeds went to the DAF, the furniture found a new home, and the couple received a very nice charitable deduction. We subsequently used their deduction to help them offset the tax impact of selling a concentrated position of stock, which they used to generate cash for a memorable family vacation.
A private foundation is a charitable organization established by an individual or family. It’s funded with an initial gift of assets and managed by trustees or a board of directors. Because it’s an independent legal entity, a private foundation allows you more control over your donations. That means you can gift to non-public charities (subject to restrictions) -- something you can’t do with a DAF.
Another major benefit of a private foundation is your ability to hire people to run it, such as family members. Family members can be paid as employees of the foundation, potentially creating a great way to keep money within your family while still receiving a tax benefit.
Charitable Trust
For families looking to gift larger sums, say $1 million or more, a charitable trust is another interesting way to give to charity. The most common type is a charitable remainder trust, in which you (or someone else in your family) retain the right to receive income based off the assets you have donated. Then when you pass away, the charity receives the remaining amount of money. This type of trust can be a good planning tool if you don’t want to leave your money to anyone in particular. Charitable trusts are drafted by attorneys that specialize in estate planning. Trusts are complex and implementing them is equally challenging, but the benefits can be immense as you can still support the causes most important to you. We help clients find the right estate attorney to draft the trust and then we walk our clients through every step to ensure the trust is implemented properly.
Conclusion
Year-end is coming. You can still support charities in need while reducing your 2024 taxes through tax-efficient charitable giving strategies. As always, we’re here to help if you need assistance with your charitable giving and legacy plans.
RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth
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