By Daniel Weitz, CFP®, CFA
It’s the most wonderful time of the year! There’s a chill in the air, holiday themed lattes at Starbucks, and my inbox is jammed full of Black Friday and Cyber Monday discount emails. Thankfully, amidst the bustle of the holiday season, my phone rings more and more with requests from clients to make donations to their favorite charities, reminding me of the truly generous nature of the clients I serve.
While charitable donations can be made throughout the year, people tend to take stock of their finances and make donations as they wrap up the year. Many people know they can deduct donations to charity from their income taxes but increasing your knowledge of tax planning strategies can maximize your giving impact. Here are three strategies you can consider to maximize your charitable giving.
Discover All The Ways To Give
Taking some time to understand the tax strategies available to you can help you decide how much to give, what asset to give, and when. Ideally, you want to create a plan that allows you to maximize what you give to charity while also maximizing the tax advantages for yourself. Keep in mind that charitable giving is tax-deductible, but only if you itemize your deductions. Be sure to speak with your CPA about whether or not itemizing your deductions is right for you. That being said, before writing a check to support your favorite charity, consider incorporating one of these giving strategies that could maximize your generosity.
Donor-Advised Funds (DAFs)
Donor-advised funds (DAF) are investment accounts, where all of the assets held in the account will eventually be donated to a charitable organization. When you fund the account with cash, securities, or other assets, you are generally able to take an immediate tax deduction (for the year in which the contributions were made). Then, the assets in your account can be invested to grow tax-free, potentially making even more money available to donate to charity.
Once the money is in the DAF, it is technically considered to be out of your estate. However, you are still the decision maker when it comes to investing the funds and when they are distributed to the charities you recommend – bear in mind all recipients must be 501(c)(3) organizations. There are no government regulations requiring that the money in a DAF be donated to charity within a specific time frame however many DAF providers have their own policies that mandate regular giving. Be sure to familiarize yourself with the policies at your chosen provider and set reminders to stick to a regular giving schedule.
Gifting Your RMD – Qualified Charitable Distributions
If you are over the age of 70½ and have an Individual Retirement Account (IRA), you are required by law to withdraw a distribution from your retirement account each year (72 if the IRA owner turned 70½ after December 31, 2019). The amount of your distribution is calculated based off of the assets held in your account. However, if you don’t need that money for living expenses, current tax law allows you to gift your required minimum distribution (RMD) directly to a charity via a qualified charitable distribution (QCD) and avoid paying taxes on the distribution.
A QCD is a distribution made from your IRA account directly to your charity of choice. The QCD counts towards your required minimum distribution for the year so long as certain rules are met. Plus, a QCD is not counted towards your annual taxable income, which is unlike regular withdrawals from an IRA account. QCD’s can be made from Traditional, Rollover, Inherited, and SEP IRAs as well as inactive SIMPLE plans. There is an annual limit of $100,000 that can qualify as a QCD, and if you are married filing jointly each spouse can give up to the $100,000 limit. For a QCD to count towards your current year's RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.
It is worth noting that while the CARES Act temporarily suspended RMD requirements for 2020, gifting funds from one’s IRA account under the QCD election may still be an attractive tax planning strategy to consider this year.
Charitable Remainder Trusts
A charitable remainder trust (CRT) is a trust that not only provides an income stream but passes the remaining value to charities of your choice when you or your beneficiary dies. There are two main types of charitable remainder trusts:
- Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount annually and no additional contributions are allowed.
- Charitable remainder unitrusts (CRUTs) distribute a fixed percentage based on the balance of the trust assets each year, and no additional contributions are allowed.
Contributions to both CRATs and CRUTs are considered irrevocable and both are required to distribute either income or principal to either the donor or a beneficiary. At the end of the trust’s term, the remaining trust assets are distributed to one or more charitable beneficiaries.
What we like about these strategies is that they allow you to convert an appreciated asset into lifetime income. With the trust, you technically donate the asset to charity before it is sold, which allows you certain tax benefits, including a charitable deduction. You will likely receive more income over your lifetime by using a charitable remainder trust than if you sell the asset outright. Some clients prefer using a charitable remainder trust over a DAF as it helps them to maintain an element of control over the trust. In creating the trust, you would assign a trustee who would be responsible for managing the trust as per the guidelines outlined in the trust document.
Organize and Plan Ahead
All of the charitable giving strategies outlined above require some legwork to establish accounts or draft the necessary legal documents. If putting a charitable giving plan in place is important to you, my advice would be to start early. Talk to your financial advisor about what makes the most sense for your individual situation.
What Strategy Will You Use?
Depending on the current state of your financial portfolio, there may be other ways to consider maximizing your charitable contributions. At Simon Quick, we remain available to discuss your individual situation to see if working with one of our advisors would be the right fit for you. Call us at 973-525-1000 or email Info@simonquickadvisors.com to learn more.
About Dan Weitz
Mr. Weitz joined Simon Quick in 2011 and is based in Morristown, NJ. As a Managing Director and Client Advisor, his focus is on providing investment and financial planning advice to high net worth individuals & families. Additionally, he works closely with endowments & foundations and regularly attends investment committee and board meetings. Mr. Weitz completed Fairleigh Dickinson University’s Financial Planning program and passed the CERTIFIED FINANCIAL PLANNER™ exam in 2009. He is also a Chartered Financial Analyst charterholder and member of the CFA Institute. Mr. Weitz holds a B.S. in Psychology from the University of Maryland and an MBA in Finance from Rutgers Business School. To learn more about Dan visit his LinkedIn.
Simon Quick Advisors, LLC (Simon Quick) is an SEC registered investment adviser with a principal place of business in Morristown, NJ. Simon Quick may only transact business in states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of our written disclosure brochure discussing our advisory services and fees is available upon request. References to Simon Quick as being "registered" does not imply a certain level of education or expertise. No information provided shall constitute, or be construed as, an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such an offer or solicitation is prohibited by law or registration. Additionally, no information provided in this report is intended to constitute legal, tax, accounting, securities, or investment advice nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. It should not be assumed that future performance of any specific investment or investment strategy will be profitable, equal any corresponding indicated performance level(s), be suitable for your portfolio or individual situation, or prove successful.