Charitable giving can help you minimize taxes while also supporting causes are meaningful to you.
Christmas is a season of giving—giving gifts to friends and loved ones; giving notes of thanks and tips to the trash collectors, mail delivery persons, landscapers, hair stylists, and all those who make our lives a bit easier; and giving our time or money to various charities asking for help this time of year. The last few months of the year make up what is commonly called the “Giving Season” for the non-profit community. As the holidays near, people feel encouraged to give more generously than during the rest of the year.
According to Steve MacLauglin, a director of product management for Blackbaud Index, approximately 34% of all charitable giving is done in the last three months of the year. Of those donations, nearly 18% are given in December alone.
In truth, we should feel the need to donate in some way to charities throughout the year. Non-profits operate all 12 months of the year and need assistance continually. For many, charitable giving is a way of life. Whether it’s to support an organization that’s touched your life in a meaningful way, a school or university that put you on the road to success, or simply a cause that you feel passionate about, charitable giving not only offers emotional benefits, but practical ones as well.
Giving Now…And After You’re Gone
For many donors, the big question is how much to give throughout your lifetime and what to leave as charitable gifts in a will or trust. For those who are not concerned about the use of assets during their lifetime—for care, or enjoyment—a charitable gift may be a regular occurrence. Some may choose to pass on assets after death, in addition to, or sometimes in place of, passing on assets to family members.
The options for charitable giving within an estate plan are varied. Before you choose a way to give, it’s important to understand the tax implications of your decisions. Giving as much as you want to charity during your lifetime and after you’re gone may help to reduce federal estate and gift taxes significantly.
Gifts made to charities, specifically, are exempt from gift tax.
Giving Throughout Your Lifetime
Generally speaking, lifetime gifts to charities can result in an income tax deduction for you, according to Fidelity Investments. But before you make a large gift, be sure to seek tax advice from an experienced attorney. You’re eligible for itemized deductions for charitable contributions up to a certain percentage of your adjusted gross income for cash contributions. Another limit applies for contributions of appreciated securities or property in any one year. You may be able to carry forward amounts that exceed the limit and deduct them over the next five years.
Highly-appreciated securities may be good candidates to give to charity during your lifetime; in addition to the income tax deduction, you bypass the capital gains tax that would be owed if you cashed them in yourself.
Know Your Options
Whether you choose to give during your lifetime or in your will, donor-advised funds are charitable giving programs generally run by public charities or financial institutions. They allow you to give on a basis intended to maximize your income tax situation and help meet the needs of the causes meaningful to you.
If you have the means and desire to play an active role in philanthropy, you might also consider establishing a private foundation. Foundation managers retain control over the investment of their foundation assets, as well as which charities will receive grants from the foundation. In addition to charities, foundation grants can be used to support individuals for hardship reasons and even scholarship programs. Along with this flexibility, however, is a significant amount of administration.
A charity can be the beneficiary of a relatively simple revocable trust or irrevocable trust. Other giving strategies using charitable trusts can provide benefits to charity as well as to your family or yourself.
A charitable lead trust lets you provide a payout to a charitable cause during your lifetime (or a term of years) and preserve assets for other beneficiaries, such as children or grandchildren. The value of the remainder gifted to your descendants will be a taxable gift if the trust is funded during your lifetime, or subject to estate tax, if the trust is funded at your death.
If you have substantially appreciated assets (real estate or stocks), you can reduce current capital gains tax on the assets by contributing the assets to a charitable remainder trust. You may also give a portion of the current value of your assets to charity, and generate a payout from the trust to yourself or someone else during your lifetime, or for a specific term.
Ensure your beneficiaries are up to date on other assets that have provisions for naming them, including investment and bank accounts with transfer on death designations. This is especially important for beneficiaries outside your immediate family, as assets don’t usually go to such beneficiaries by default or outside of the probate process if they’re not named properly.
Retirement assets may be good candidates for charitable bequests because they can be among the highest taxed assets in any estate. Fidelity Investments reveals that leaving your retirement assets to a charity has two distinct advantages:
- Increasing the impact of your bequest—the charity would not have to pay income taxes on your donation when it receives assets from your retirement account.
- Decrease the estate tax burden for your family—your assets would pass directly to the charitable organization, so your estate would be eligible for a federal estate tax charitable deduction on the account’s value.
Of course, make sure your beneficiary designations are up to date. If you have missing or incorrect designations, your assets may not be distributed as you intend or your charitable beneficiaries may have to wait to take ownership and incur costs due to probate.
The rules for 401(k)s and other qualified retirement plans are similar to those for IRAs. If you’re married and want to designate beneficiaries other than your spouse, you may need written consent from your spouse. Otherwise, such plans follow roughly the same guidelines for what is taxable, but other features will vary from plan to plan. Be sure to contact the plan’s administrator for specific rules governing yours.
Let Oliver & Cheek, PLLC guide you in planning for charitable donations now and in the future. For more information, call (252) 633-1930 or visit www.olivercheek.com.
(Sources: Fidelity Investments; Investment News; T. Rowe Price; Vanguard Charitable; The Street; Morgan Stanley; Real Simple; and USA Today.)