By Sean Dowling
’Tis the season for the charitably inclined who also like to reduce their tax bill. With only a month to go, time is running out for charitable giving and tax planning. Luckily, the world of philanthropy is trying to make all our lives easier every year.
Donor Advised Funds: The Savvy Giver. For those of you who give regularly and have not considered a Donor Advised Fund (DAF), now is the time. They have become popular in the past decade with a few big players—Fidelity, Vanguard and Charles Schwab leading the charge. Many of your alma maters may sponsor a DAF as well.
If you are not familiar with DAF, it’s time to get familiar. They allow you to make contributions to your DAF at any time, then dole it out later (years later if you like) to your favorite charities. You get the upfront tax deduction in the year you contribute to your fund and the money grows tax-free. It’s kind of like an IRA for charities. The DAF is like having your own family foundation without the administrative headache. As an added bonus, the technology that comes along with the DAF is really sleek.
You can set these DAF up under an alias that pays homage to your family or maintains your anonymity. As with an IRA, you can name future administrators, such as your children, so that when you are no longer here your and your family’s charitable work can be continued. Fidelity Charitable is currently the largest DAF administrator, with a lot of flexibility on account size and gift amounts.
Double Tax Free: The Thrifty Giver. If you like to give as much as you like to get, you should consider making Qualified Charitable Distributions from your IRA or gifting appreciated stock in your end of year planning. The trifecta is if you can gift appreciated stock and make a Qualified Charitable Distribution in connection with a Donor Advised Fund.
The Qualified Charitable Distribution (QCD) has recently been made permanent by the Internal Revenue Service whereby you can gift your required minimum distribution up to $100,000 directly to a charitable organization after you reach the age of 70 and a half. This is a good option for those trying to manage their taxable income.
For many years, savvy taxpayers have been giving appreciated stock to charity. Some may still think this generally saves only long term capital gain taxes, but under the current rates that can be as high as 30 percent when considering state tax as well. This is something to think about with the possibility of a lower rate under the new administration.
Multi-strategy Giving: The Legacy Giver. There are a few other strategies worth getting familiar with if you are charitably inclined. The first is a Charitable Remainder Trust. These trusts are designed to provide income for a person during life and a charitable organization at some point in the trust term. As with the Donor Advised Fund, there is an upfront tax deduction you get with the added benefit of providing an annual income for a person (yourself, spouse, or child, for example). If you are selling rental real estate or other income-producing property, you should explore the charitable remainder trusts.
Another, less common, strategy is to gift shares in closely held businesses, private equity or real estate to Donor Advised Funds. These strategies require looking at many angles, but in some cases it can save significant tax on a private business sale that the owner or family would have otherwise had to pay. Some Donor Advised Funds are allowing these “non-traditional” assets to be contributed to their funds, which makes for some exciting planning opportunities.
They say when you give, you get more back in return. With the strategies available today that couldn’t be truer. Many are surprised that sometimes giving to charities can actually increase our balance sheets. It always helps our spiritual balance sheet, but with thoughtful planning it can help our bank accounts, too.
The world of philanthropy is ever expanding, and the current landscape has much to offer modern givers. Those willing to do a little extra investigation will find there is a lot of potential upside for your charities and your family.
