Knowing Your Charitable Giving Options

Posted by Matthew McClintock

The charities you support greatly appreciate your cash contributions; these contributions fund their operations. However, there are other ways you can give . . . which may be advantageous to you from a tax perspective and may allow you to incorporate giving to your favorite charities as part of your overall estate planning. Below is a general description of some of these strategies.

Consider Giving Appreciated Securities

Rather than donating cash or a check, consider contributing appreciated, marketable securities. You will receive a tax deduction for the current fair market value of the stock, even though if you sold it you would have to pay income tax (in the form of capital gains tax). And the charity can sell the stock and not pay any tax.

Consider a Capital Gains Deferral Trust

Rather than giving appreciated securities, another option is to give those securities to a specific type of charitable trust, recognized and accepted by the IRS that can then sell the securities and not pay the tax. As a result, the full value of the securities can then be invested.

The trust then pays a fixed percentage, typically to you and/or your spouse for life, based upon the value contributed. At the end of that term the remaining balance is paid to your favorite charity or charities.

With this strategy you receive an income tax deduction for the present value of the amount going to charity, and the assets are protected from creditors and outside of your estate for purposes of the estate tax.

For example, suppose you own Microsoft stock worth $1 million with a very low tax basis. Thus, if you sold the stock today, you would pay $200,000 in federal capital gains tax (20%) and $46,300 in Colorado capital gains tax (4.63%), netting you $753,700.  (For our California clients, the capital gains tax on income over $1 million is 13.3%, for a $131,000 California state tax on capital gains. Thus, a Californian would net $667,000.)

If instead you transferred the stock to this tax-deferral trust, the trust would sell the stock and have $1 million to invest. There are several options but with the most common the trust would pay you (and your spouse, if any) a fixed annuity (say 5%) for your lives. Thus, you would receive $50,000 per year for the rest of your lifetimes(s), subject to tax.

Consider an Annuity to Charity Trust

Another option is to contribute assets to a different type of charitable trust, one that pays an annuity to charity for a specified number of years, and then transfers the trust balance to your heirs protected from creditors and free of gift or estate tax.

This type of trust is perfect to establish a long-term charitable giving strategy (for example, if you want to contribute $x to your favorite charity for the next 20 years) now. And under certain circumstances, this trust can even provide you with an upfront income tax deduction for the present value of the annuities paid to charity.

Again, transferring assets to this type of irrevocable trust protects them from potential creditors of you and your heirs.

Consider Distributions Directly from Your IRA

If you are over 70 1/2, you can make distributions directly from your IRA or qualified plan to a qualifying charity of up to $100,000 per year.  This reduces or eliminates your required minimum distribution by the amount of the direct charitable contribution (up to $100,000) and, significantly, removes the direct charitable contribution from that year’s taxable income.  Thus, the qualifying distribution does not increase your taxable income.  This is the perfect way to support your favorite charity or charities if you don’t need some or all of your required minimum distribution.

Special Charitable Incentives for 2020

There are no required minimum distributions for 2020 as a result of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act.  The CARES Act also created several other incentives for people to help charities in 2020, including a charitable deduction of up to $300 even for taxpayers who don’t itemize deductions.  (Recall that the 2017 Tax Act doubled the standard deduction to $12,400 for single filers and $24,800 for married couples filing jointly in 2020; those who utilize the standard deduction could not otherwise deduct charitable contributions absent the $300 deduction.)

The CARES Act also permits a charitable deduction for cash contributions of up to 100% of one’s adjusted gross income in 2020, rather than the typical 60% limitation.

These charitable strategies are often one component of a comprehensive set of solutions crafted to help our clients realize their goals and objectives.  

At Evergreen Legacy Planning, LLP, we help affluent individuals and families strategically protect and enjoy the wealth they’ve worked hard to build. As experienced members of the WealthCounsel, STEP, the ABA, and other professional organizations, we have decades of proven experience helping individuals create legacies that will last generations. Call us today at (877) 757-8120 or contact us online to schedule a consultation to learn more.

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