Making Philanthropy Easy: Increasing the Efficiency and Impact of Your Generosity
By A. Scott White, CFP®, ChFC®, CLU®
President, Scott White Advisors
When I discuss financial goals with clients, philanthropy often arises as a vital component of the legacy they will leave behind. Charitable giving can play an important role in many estate plans. Philanthropy can give you great personal satisfaction, and it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die. Depending on my clients’ unique situations, I may recommend the following giving vehicles.
Charitable Gift Annuities
A charitable gift annuity is a contract between a donor and a charity with the following terms: As a donor, you make a sizable gift to charity using cash, securities or other assets. In return, you become eligible to take a partial tax deduction for your donation, plus you receive a fixed stream of income from the charity for the rest of your life. Your annuity can be funded with cash donations, but potentially also securities and gifts of personal property. A second tax benefit may come by donating long-term appreciated stock or other property. By donating non-cash assets directly, it is possible to reduce or eliminate the capital gains tax you’d ultimately pay if you sold them first and then donated the proceeds. You must pay income tax on the income stream from the annuity each year.
Pooled Income Funds
A pooled income fund is a type of charitable trust established and maintained by a qualified nonprofit organization, and gets its name from the fact that donors’ resources are pooled for investing purposes. A pooled income fund allows you to do three things: ensure a perpetual income, claim a current tax deduction, and make a future gift to charity. The fund invests the contributions to provide dividends for the fund donors and allows income from the fund to be distributed to both the fund’s donors and named beneficiaries, according to their share of the fund. Contributors receive income distributions during their lifetimes and after they have passed, the fund distributes the remaining assets to the designated charity or charities.
Donor-advised funds are the fastest-growing charitable giving vehicle in the U.S. because they are one of the easiest and most tax-advantageous ways to give to charity. Functioning like a charitable investment account, for the sole purpose of supporting charitable organizations you care about, donor-advised funds are established at a public charity. When you contribute cash, securities or other assets, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity. If you donate cash, via check or wire transfer, you’re generally eligible for an income tax deduction of up to 60 percent of your adjusted gross income. You can incorporate your donor-advised fund into estate planning by making a bequest in your will to the donor-advised fund sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy or charitable trust. By leaving instructions with the donor-advised fund sponsor, you can support multiple charities with one bequest. These gifts can also help reduce or eliminate the burden of estate tax for your heirs.
Qualified Charitable Distributions
QCDs are a direct transfer of funds from your IRA custodian, payable to a qualified charity, and they can be counted toward
satisfying your required minimum distributions (RMDs) for the year as long as certain rules are met. In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA. While many IRAs are eligible for QCDs, you must be 70½ or older to be eligible to make a QCD, and it is limited to the amount that would otherwise be taxed as ordinary income. The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.) Also, QCDs don’t require that you itemize, which due to the recent tax law changes means you may decide to take advantage of the higher standard deduction, but still use a QCD for charitable giving.
When it comes to the philanthropic causes they support, my clients follow their passion. There are many ways to give to charity, and each client’s estate plan is unique. It’s never too early to consider your legacy. The surest way to provide for the financial and emotional well-being of your heirs and beneficiaries is through comprehensive planning. Let me know how I can help you make choices that increase the efficiency and impact of your generosity.