The year 2013 is particularly good for affluent, charitably inclined individuals and families to give to favorite causes. The strong equity performance in 2013 has helped many affluent families feel more comfortable making charitable gifts. And today’s increased rates on higher-income taxpayers can make charitable giving more attractive from a tax perspective than last year.
The good news is that, generally, the value of a deduction increases when rates are higher. However, it’s always important to run the numbers, to see what your client’s actual tax savings will be. The amount of the charitable income tax deduction depends on many factors, including the kind of asset given, the nature of the charitable recipient and the donor’s adjusted gross income (AGI). In addition, donated assets reduce a client’s taxable estate.
Benefits of Strategic Giving
Philanthropic planning can help your client save taxes while supporting favorite charities. And some philanthropic strategies can also benefit the entire family. The strategy that’s right for the client will depend on their giving and personal financial goals, the assets they wish to give and the level of complexity with which they are comfortable.
For example, writing a check to charity is easy, will likely provide an income tax deduction and will remove assets from the estate, but won’t offer as many tax planning opportunities as some of the strategies described below. While there are many other forms of charitable gifts, I’ve highlighted those particularly suitable for high-net-worth families.
IRA Direct Charitable Distribution
The individual retirement account charitable “rollover,” scheduled to expire at year end, permits individuals aged 70½ or older to transfer up to $100,000 directly from an IRA to “qualified” charities without recognizing income or taking a charitable contribution deduction. The distribution can also satisfy some or all of a client’s required minimum distribution. The rollover contribution rulecan be helpful for taxpayers seeking to minimize their modified AGI tostay below the threshold for the new 3.8 percent surtax on net investment income. It can also help clients who: (1) don’t itemize deductions; (2) have already maximized their permitted charitable contribution deductions; (3) live in a state that doesn’t provide for charitable contribution deductions from state income tax; or (4) who can otherwise benefit from a lower amount of AGI.
IRA assets are particularly attractive to give to charity, rather than to leave for heirs, as heirs will pay income tax on the entire IRA distribution. Particularly if the estate is subject to estate tax, the combined wealth transfer and income tax burden on IRA assets can be extremely high.
Outright Gift of Appreciated Securities
An outright gift of appreciated securities that a client has held for at least a year can be a very effective giving strategy. The client will generally be allowed a full fair market value (FMV) deduction for the donated securities, up to 30 percent of AGI, if donated to a public charity; 20 percent of AGI if donated to a private foundation. Beware, however, of advising a gift of closely held stock to a private foundation, as a full FMV deduction isn’t allowed. In addition to the deduction itself, a client will also save the capital gains taxes (both federal and state, if any) that would have applied if they sold the securities and donated the proceeds. Put differently, a gift of stock to a charity allows a client to put more in the charity’s hands without giving up more of their resources.
Gifts Benefitting the Donor and Charity
Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are more complex forms of charitable giving, but they provide opportunities to benefit both charities and family members.
A CRT provides income to the donor or his family, for a term or for life, with the remainder going to charity. Donors receive an income tax deduction for the actuarial value of the remainder interest. When a CRT sells appreciated assets, the capital gains tax is deferred, making a CRT particularly attractive to a donor whose goal is to diversify an asset and then derive an income stream from it. A CRT must pay out annually at least 5 percent of its initial value or 5 percent of its FMV. In today’s low interest rate environment, a CRT can be an attractive way to provide a fixed income stream at considerably higher rates than most fixed income investments are yielding.
Basically the inverse of a CRT, a CLT provides an annual payment to charity for a term, with the remainder interest going to family members or trusts for their benefit. The value of the income or lead interest, determined under an IRS valuation rate, reduces the gift tax cost of the transfer of the remainder. Using a CLT permits the transfer of appreciation above the Internal Revenue Service valuation rate to family, free of estate tax. CLTs are particularly attractive in today’s low interest rate environment. CLTs may be structured in different ways to take advantage of income tax deductions or to leverage the generation- skipping transfer tax exemption.
If a client wishes to contribute substantial assets to charity and is prepared to devote more time and expense to planning and administering a charitable entity, a private foundation could be an attractive option. Private foundations—typically funded by a single donor or family—provide numerous estate planning and income tax benefits, which may be even greater this year under the new higher tax rates. Private foundations allow charitably minded individuals and families to maintain more control, create a long-term charitable legacy, and unite family members around a common philanthropic goal.
For a client who is philanthropically inclined and wishes to maximize gifts to charitable causes while reducing wealth transfer, income, capital gains or net investment income tax, there’s a charitable giving strategy to meet his goals.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought