Charitable Giving- Why Give it to Uncle Sam When You Don’t Have To?

By Michelle Mabry, CFP®, AIF®

August 2011


Despite the challenging economic climate, many clients continue to identify charitable giving as one of their highest priorities. As your financial advisor, we are often called on to not only help clients determine the amount they can comfortably allocate toward their philanthropic goals, but also to provide guidance on how to implement a charitable giving strategy.

Charitable giving isn’t just for the über-wealthy—and it doesn’t have to be overly complicated. So what are some ways you can meet your financial objectives, while simultaneously maximizing your tax benefits and the charitable causes you want to support? Consider some of these simple gifting strategies.

One of the simplest, yet most tax-efficient ways to give to charity is by donating appreciated, long-term capital assets, such as publicly traded stock. When you donate stock with a built-in, long-term capital gain, you will receive an income tax deduction based upon the fair market value of the stock as of the date of donation. The amount deductible is limited to 30 percent of the donor’s adjusted gross income (AGI) in the year of donation. Any amount above that threshold may be carried forward for five years to offset subsequent income tax liability. In addition to securing a valuable income tax deduction, you avoid any capital gains tax, which would be realized if the stock were otherwise sold.

The receiving charity benefits from the donation of stock because, as a tax-exempt entity, the charity can sell the stock without incurring any tax liability. This favored tax status allows the charity to put the full proceeds of the liquidation to work toward its charitable cause.

Donor-advised funds (DAFs) have become very popular among clients and advisors alike, and it’s easy to see why once you understand how these funds work.

Essentially, a DAF is an account administered by a public nonprofit organization to hold a donor’s charitable contributions, which will be distributed to numerous qualifying charities at various points in the future. While the charity owns the assets, the donor retains the role of grant advisor to the DAF; therefore, he or she can make recommendations regarding which charities should receive grants from the DAF. For donor’s, this control is part of the DAF’s appeal. While private foundations allow similar control, their complexity and high cost can be prohibitive.

DAFs have additional characteristics that you may appreciate:

  • A DAF is relatively simple and inexpensive to create and administer.
  • A donation to a DAF can provide income tax benefits equal to making a direct, outright donation to a charity.
  • You can name successor grant advisors, such as your children, to the DAF, creating a legacy of philanthropy.
  • The DAF can be named after the donor or donor’s family (e.g., Smith Charitable Fund); however, specific grants can be delivered anonymously, if desired.
  • The DAF can be named the beneficiary of charitable bequests from an estate, IRA, annuity, and life insurance policy.
  • For more complex charitable planning cases, the DAF may be named the lead or remainder beneficiary of a charitable trust.
  • Families who have a private foundation but no longer want to deal with the accompanying expense and administration may find it beneficial to “collapse” the foundation into a DAF.
  • Rather than making annual gifts from their checkbooks, you can “front-load” your charitable giving by contributing appreciated stock. This provides the DAF with a source for making future gifts, while helping you keep more cash on hand to support your lifestyle. This strategy can be further enhanced if you fund the DAF in a year when your taxes are expected to be higher than normal (i.e., due to a large bonus, sale of property, or other infrequent taxable event).

The Tax Relief Act of 2010 extended the qualified charitable distribution (QCD) through 2011. First enacted in 2006, the QCD provision allows individuals age 70&fraq12; or older to distribute up to $100,000 from an IRA directly to a public charity, without having to include the distribution as income. While the distribution isn’t included in your income, it does count toward satisfaction of your required minimum distribution (RMD), making it an excellent way for individuals who don’t rely on RMDs for income to meet their charitable goals.

The ability to avoid recognition of income provides other benefits as well. For example, it can help you avoid a potential increase in the amount of tax levied upon your social security benefits. Additionally, for those who do not itemize their deductions, you will find a QCD to be an efficient source for making donations, whereas donations from another source would not provide any tax benefit.

For wealthier individuals, QCDs provide an opportunity to reduce the taxable estate by depleting accounts that would otherwise be subject to estate tax, as well as to income in respect of a decedent. And, finally, QCDs provide a means of tax-efficient gifting for those who exceed the AGI limitations (50 percent for cash, 30 percent for long-term capital gain property) for the deductibility of charitable contributions.

Giving away wealth may seem a relatively simple undertaking, but it’s a serious matter.  Indeed, Aristotle had it correct when he said, “To give away money is an easy matter and in any man’s power, but to decide to whom to give it, and how large, and when, and for what purpose and how, is neither in every man’s power nor an easy matter.”

We are here to help you enhance the difficult task of charitable giving. If you would like to discuss charitable planning opportunities, please give us a call.


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