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Four Charitable Giving Strategies for Affluent Families Thumbnail

Four Charitable Giving Strategies for Affluent Families

By: Anders Velischek, CFP®

Individuals and families choose to give money to charitable organizations for many different reasons. Sometimes, these reasons are personal — for example, to support a specific cause or organization or to leave a personal or family legacy. 

However, charitable giving can also be a key component of an overall wealth management strategy. By devising a comprehensive charitable giving strategy, you can benefit the charities you want to support and also realize financial and tax benefits.

Affluent individuals and families in particular can reap big benefits by devising and implementing charitable giving strategies. These include estate tax benefits as well as the ability to lower current taxes through charitable deductions and other sophisticated techniques. Here are four charitable giving strategies to consider:

1. Donate appreciated assets

This is one of the most valuable — but also commonly overlooked — charitable giving strategies available to the affluent. Instead of donating cash to a charity, you would give the charity an asset that has appreciated in value since you acquired it. The charity, meanwhile, will receive the full current value of the asset. Real estate, common stock and other securities can be donated in this fashion.

By utilizing this strategy, you will avoid having to pay capital gains tax on the asset’s appreciation. You’ll also be able to deduct more than what you originally paid for the asset. And you won’t have to touch your liquid funds in order to make the donation. An example reveals the potential benefits of this strategy. 

Let’s say you bought a stock 10 years ago for $2,500 and it’s now worth $10,000. If you sold the stock and gave the proceeds to charity, you’d pay $1,500 in capital gains tax (at the top 20% capital gains rate), leaving just $8,500 to give to the charity. But if you transferred the stock directly to the charity, neither you nor the charity would owe the tax and the charity would receive the full $10,000. Plus, your out-of-pocket cost of the donation would be just $2,500, which is what you paid for the stock 10 years ago. You could then repurchase the stock with the cash you would have donated if you would still like to maintain that exposure. Your new tax basis is now $10,000. Keep in mind that this only applies to assets that have been held for at least one year. 

2. Establish a charitable foundation

These can take several different forms, including a Donor Advised Fund (DAF), family foundation or community foundation. Family foundations make private grants to charitable organizations. Community foundations are similar but are administered by outside professionals who direct contributions as they see fit.

Meanwhile, a DAF is a pool of money managed by a charitable organization (like Schwab Charitable or Fidelity Charitable). A DAF is like an investment account, where all the assets in the account will eventually be donated to an IRS-qualified public charity. What is appealing about this method is the ability to invest the DAF assets in hopes of growing them over time to help you make an even bigger impact. Donations to DAFs are tax-deductible during the year when they are made. One of the biggest benefits of establishing a DAF is that you can donate assets and claim a tax deduction now and decide later which specific charity will receive the gift. Family members and friends can pool their resources and give to a DAF together if they like, which make DAFs a great option for establishing an enduring family legacy of philanthropy.

3. Utilize charitable trusts

Trusts can serve as an especially valuable charitable giving vehicle. The two main types of charitable trusts are Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs).

A CRT enables you to create an income stream for yourself and donate assets to charity at the same time while also reaping tax and estate planning benefits. You will establish and make donations of cash or property to the trust and receive income from it for a set number of years, including during your lifetime. When you die, whatever assets are left over will pass on to the charities you’ve designated on a tax-free basis.

A CLT is basically the opposite of a CRT: It will provide income to your designated charities for a set number of years. After this time or upon your death, whatever assets are left will be transferred tax-free to you or your designated beneficiaries.

4. Make a qualified charitable distribution (QCD)

This strategy enables qualifying individuals to donate money that’s held in an IRA instead of giving away liquid assets. QCDs are especially beneficial for individuals who must take taxable required minimum distributions (RMDs) from their traditional IRAs even if they don’t need the money, since taxes aren’t assessed on QCDs.

Making a QCD does not impact your adjusted gross income (AGI), which is beneficial because a number of phaseouts for certain tax breaks are based on AGI (like those for itemized deductions, Roth IRA eligibility, and the net investment income tax). And since QCDs don’t count toward taxable income, you could possibly take the standard deduction instead of itemizing deductions and still realize tax benefits from making charitable gifts.

You can use a QCD to donate up to $100,000 annually to charity. Distributions must be made directly from the IRA to the charity — they can’t be made to you and then you turn around and write a check to the charity. In this case, the donation would not be a QCD and the tax benefits would be forfeited.

A Simon Quick advisor can help you devise a comprehensive charitable giving plan that includes strategies such as these. To learn more, call us at (973) 525-1000 or send an email to info@simonquickadvisors.com.

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About Anders

Mr. Velischek joined Simon Quick in July of 2016. He is currently a member of the Client Advisory team and works from our Morristown, NJ office. He is responsible for supporting the Partners and Client Advisors in assisting with financial planning for clients, implementing investment plans, preparing investment performance reports and coordinating client communications. Prior to joining the Client Advisory team Mr. Velischek spent six months in the Simon Quick Analyst Training Program. Anders completed the Financial Planning Certificate Program at Fairleigh Dickinson University in September 2019 and became a CERTIFIED FINANCIAL PLANNER™ practitioner in December 2019. Learn more about Anders on LinkedIn.


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