Charitable giving is one of the most rewarding ways to make a difference in the world and create a lasting legacy, but without a clear understanding of the various giving vehicles available, you may unintentionally limit the impact of your generosity. Not only could your chosen charity receive less than you intended, but you might also miss out on valuable tax benefits. It’s essential to educate yourself about the different options, ensuring that both you and the causes you care about get the most out of your contribution.
In this post, I’d like to talk about some charitable giving vehicles that could allow you to fulfill your personal and financial goals. But before we dive in, let’s quickly discuss why charitable giving is important.
Why Charitable Giving Matters
Many people believe that charitable giving is mostly about getting a tax break and minimizing taxes. While it’s true that the government incentivizes giving by allowing you to deduct charitable contributions from your taxable income, reducing your overall tax burden, charitable giving is not just about taxes.
Charitable giving is not just about taxes.
Let me give you an example: Imagine you live in California and have a gross income of $1 million. For simplicity, let’s assume your combined federal and state marginal tax bracket is 50%. This means you would pay $500,000 in taxes and keep the other $500,000.
Now, let’s say you decide to donate $300,000 to charity. This donation reduces your taxable income to $700,000, lowering your tax bill to $350,000. So, the charitable donation saved you $150,000 in taxes. However, despite the tax savings, you end up with less money overall: $350,000 compared to $500,000 if you hadn’t made the donation. This example illustrates that charitable giving isn’t just about saving on taxes.
So, if it’s not about taxes, what is charitable giving really about?
While there’s no single answer, and motivations can vary widely, I believe - and my personal experience supports this - that people donate money and participate in charitable giving primarily for personal fulfillment and purpose. Giving provides a sense of personal satisfaction and allows people to experience joy and purpose from knowing that their contributions are making a difference.
Another significant reason is the desire to leave a lasting impact on the world. Donors often support causes that align with their values, helping to create a legacy that continues to influence and benefit future generations. Charitable giving allows individuals to ensure that their values and priorities are carried forward.
Finally, many donors are motivated by a desire to effect social change. They see charitable giving as a way to address systemic issues like poverty, inequality, or environmental degradation. By supporting organizations that work on these issues, donors feel they are contributing to a better world.
Integrating Charitable Giving into Your Financial Plan
Whatever your reason for giving, charitable giving has deep roots in our society, reflecting our shared values of compassion, generosity, and social responsibility. Whether you are already actively involved in supporting causes you care about or are beginning to think about how you can make a difference, your charitable giving strategy should be an essential part of your overall financial plan.
By integrating charitable giving into your financial strategy, you can achieve both your philanthropic and financial goals more thoughtfully and effectively. A well-planned charitable giving strategy not only maximizes the impact of your donations but also ensures that you benefit from any available tax advantages.
There are many ways to give to charity, and choosing the right vehicle depends on your goals, the amount you wish to give, and whether you want to give during your lifetime or after your death.
Lifetime Charitable Gifts
Making charitable gifts during your lifetime offers the benefit of seeing the impact of your generosity while also enjoying immediate tax benefits, such as an income tax deduction. The most common option to support a charity include:
Direct Gifts
The simplest and most straightforward method of charitable giving is a direct gift. This involves giving cash, property, or other assets directly to a charity. The main advantage of this approach is its simplicity - there’s no need for complex legal arrangements or intermediaries. You can claim an income tax deduction for the fair market value of the gift, and for appreciated assets, you may avoid paying capital gains tax.
However, it's important to note that the value of your cash contribution is reduced by any tangible benefits you receive in return for the donation.
Donor-Advised Funds
A Donor-Advised Fund (DAF) is becoming a popular option for those who want flexibility in their giving. You can donate assets to a DAF, take an immediate tax deduction, and then recommend grants to your chosen charities over time. This allows you to spread out your giving, making a series of donations that can be adjusted based on your financial situation or changing priorities.
DAFs are particularly useful if you want to make a significant donation now but aren’t yet sure which charities you want to support. In addition to that, DAF is a great way to bunch your charitable contributions and get a higher itemized deduction during years when your income is high.
Charitable Gift Annuity
A Charitable Gift Annuity (CGA) is a contract between you and a charity where you transfer assets to the charity in exchange for a lifetime income stream. The charity agrees to pay you (or a designated beneficiary) a fixed income for life, and the remainder of the gift goes to the charity after your death. With increase in life expectancy, this vehicle is ideal for those who want to support a charity while ensuring they receive income during their lifetime.
Also, rising interest rates have increased the popularity of CGA’s as the fixed payments from new CGA contracts are now more attractive.
Additionally, you can claim a partial tax deduction at the time of the gift, and part of the annuity payments may be tax-free.
A CGA can be funded with cash, securities, and even real estate subject to gift acceptance policy of the charity. Following the enactment of the Secure Act 2.0, individuals aged 70½ and older are allowed to make a one-time distribution of up to $53,000 from their IRA to one or more CGAs. This distribution is treated as a Qualified Charitable Distribution and counts against the annual QCD limit of $105,000 in 2024.
Deferred Charitable Gift Annuities
A Deferred Charitable Gift Annuity operates similarly to a standard CGA, but the payments begin at a future date of your choosing. This option is advantageous if you’re looking to supplement your retirement income later in life while also securing a current tax deduction. The longer you defer the payments, the higher the income payments will be, allowing you to plan strategically for your future financial needs.
Charitable Remainder Trusts
A Charitable Remainder Trust allows you to receive income from the trust during your lifetime or for a period of years, with the remainder going to charity after your death. This provides both an income stream and significant tax advantages. By transferring appreciated assets into the trust, you can avoid immediate capital gains tax and receive an income tax deduction for the present value of the remainder interest that will go to charity. You decide the payout rate of the trust but the minimum payout should be 5%.
This vehicle is ideal for those who want to give to charity but still need income from their assets during their lifetime.
There are two types of charitable remainder trusts, a charitable remainder annuity trust and a charitable remainder unitrust – I will talk about both trusts in the future.
Bargain Sales of Property
A bargain sale involves selling property to a charity at a price significantly below its fair market value. In this arrangement, the charity benefits from acquiring the property at a reduced cost, while you receive a charitable deduction for the difference between the property’s fair market value and the sale price. This approach allows you to support a charity while also realizing a partial sale price for the property.
For example, suppose you own a piece of real estate valued at $500,000 with an adjusted basis of $500,000. You choose to sell it to a charity for $200,000 in cash, significantly below its fair market value. In this bargain sale, the transaction is divided into two parts:
a sale for $200,000 and
a charitable contribution equal to the difference between the property’s fair market value and the sale price, which amounts to $300,000.
As the seller, you can claim a charitable deduction for the difference between the property’s fair market value ($500,000) and the sale price ($200,000). This deduction amounts to $300,000, which can be used to offset your taxable income.
Life Insurance
Gifting a life insurance policy to a charity is another powerful way to support a cause you care about. You can transfer ownership of a fully paid life insurance policy to a charity and the charity can either cash in the policy immediately or hold onto it, receiving the death benefit when you pass away. You may be eligible for an immediate tax deduction equal to the policy’s cash value.
You can also name a charity as the beneficiary of an existing life insurance policy. While you won’t receive an immediate tax deduction, the death benefit will pass to the charity without delay of probate and tax-free, potentially resulting in a substantial gift.
Leveraging life insurance in your charitable giving can be especially valuable if you anticipate that a will dispute could undermine the intended gift to charity.
Qualified Charitable Distributions
A Qualified Charitable Distribution (QCD) allows individuals aged 70½ or older to transfer up to $105,000 annually from their IRA directly to a charity in 2024. The QCD counts toward your Required Minimum Distribution (RMD) but is not included in your taxable income. This makes it a highly tax-efficient way to donate to charity, especially if you don’t need the RMD for personal expenses.
By reducing your taxable income, you also lower the potential impact on your Social Security benefits and Medicare premiums.
Charitable Transfers After Death
If a charitable gift is made upon an individual's death, it doesn't qualify for an income tax deduction, but it may offer estate tax benefits. The timing of the gift is determined by when it becomes irrevocable. When an individual leaves a charitable gift at death, the asset's value is included in the gross estate. However, the full value of the asset can be deducted from the adjusted gross estate using the unlimited charitable deduction, which helps reduce the taxable estate.
If you are looking to structure your charitable giving as part of your estate plan, there are several methods to ensure your assets go to the causes you care about after your death.
Bequest
A bequest is a provision in your will or trust that directs a specific asset, dollar amount, or percentage of your estate to a charity upon your death. Bequests are flexible and can be changed at any time during your life. They also offer the advantage of reducing the taxable estate, which can lower estate taxes. However, there are certain requirements that must be met for your bequest to qualify for the estate tax charitable deduction. First, the bequest must be mandatory. Second, the amount of the bequest must be determinable at the time of your death, and the asset must be included in your gross estate. If these rules aren’t followed, such as giving your executor the discretion to determine the amount of a charitable gift, the IRS may challenge the bequest, and the court may side with the IRS, potentially disallowing the estate tax charitable deduction.
Nevertheless, including charitable bequests in your will ensures that your commitment to the causes you care about continues after your passing.
Charitable Lead Trusts
A Charitable Lead Trust works in the opposite way of a Charitable Remainder Trust. In this arrangement, the charity receives income from the trust for a specified period, after which the remaining assets revert to your heirs.
This vehicle is often used by high-net-worth individuals who don’t need the current income from a particular asset and wish to reduce the estate tax burden on their heirs while also making a substantial charitable contribution during their lifetime.
It is most advantageous to fund a charitable lead trust with highly appreciating assets since appreciation is effectively removed from the estate.
Naming a Charity as a Beneficiary
Another simple yet effective method is naming a charity as a beneficiary of your retirement account, life insurance policy, or other financial accounts. This can be done without altering your will or trust, and it allows you to retain control of your assets during your lifetime while ensuring they benefit a charity after your death. Additionally, these transfers can avoid estate taxes, ensuring more of your assets go to the causes you care about.
Achieving Your Charitable Giving Goals
Charitable giving is not just about making a donation; it's about making a difference and creating a legacy. By understanding and utilizing various charitable giving vehicles, you can enhance the impact of your contributions while aligning them with your personal and financial goals.
By making charitable giving a part of your financial plan, you can maximize the impact of your generosity, reduce your tax burden, and ensure that your legacy lives on. Whether through direct gifts, trusts, or bequests, there are numerous ways to support the causes you care about and make a lasting difference in the world.
Charitable giving is a powerful tool that not only benefits society but also brings profound personal fulfillment. As you consider your legacy, think about the causes that matter most to you and how you can use your resources to make a meaningful and lasting impact.
If you want to create a lasting legacy and support the charitable causes you care about, feel free to book an estate clarity meeting with us. We’ll help you explore your charitable giving strategy and determine which giving vehicles best align with your goals.
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