Summary
- There are many reasons to consider charitable gifting of wealth and assets:
- You can support a cause you care about
- Your charitable donations may qualify for tax deductions
- You may be able to reduce your taxable estate
- There are various vehicles for gifting funds to charities:
- Cash donations, either one time or recurring
- Donor Advised Funds
- Qualified Charitable Donations
- Various Trusts
- Or, if you’d prefer, you can donate your time instead of funds to your charity(ies) of choice
- There are tax considerations to charitable gifting
Reasons to Give
Regardless of how much wealth you have, you may be compelled to donate to a charity (or multiple!). Perhaps you have an appreciation for a non-profit in your local community, or a desire to contribute to the advancement of specific research. You may have a desire to see the impacts of charitable gifting during your lifetime, or you may be motivated to leave a lasting impact after your time. Charitable gifting is a great way to achieve these goals!
But there can be genuine financial benefits to charitable gifting, too! For example, your charitable donations may qualify for tax deductions. Or, you may have a sizable estate that would be subject to significant estate taxes after your passing; gifting can reduce – or eliminate – these taxes (more on taxes later!).
Ways to Give
Donating Cash: Obviously, and most simply, you can give to your preferred charity(ies) by donating cash. You can make one-time or recurring donations via cash (with literal cash, check, or electronic transfer).
Qualified Charitable Donation: If you are 70½ or older and have a traditional IRA account, you can satisfy your required minimum distribution requirement by donating up to your RMD amount directly to the charity of your choice. The RMD would normally be taxed as income, but when donated directly to charity it is exempt from taxation. There are IRS limits to the amount of funds that can be exempted, any amount over this limit is taxed as income regardless of donation to charity. It’s important that the donation be made directly to the charity of your choice directly from your IRA account, because the tax benefit does not apply if the RMD hits your bank account and is then donated. We’ll discuss itemizing taxes in the Taxes section ahead, but QCDs are unique in that you can receive the tax benefits without itemizing your deductions on your tax return.
Donor advised funds are a powerful but complicated means of gifting to charity. A donor can gift cash, securities, real estate, and more into a donor advised funds account and immediately enjoy a tax benefit. After making a contribution, the donor maintains control related to how their contribution is invested, and they also get to decide when and how the funds are ultimately given to the benefiting charity. The contribution and any appreciation is an irrevocable gift.
Advanced Strategies: There are also various trusts available as vehicles for charitable gifting. There are Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs), both of which allow you to donate funds to a trust from which you can take income for a specified period or for life. At the end of the term, whatever remains is donated to a designated charity. Charitable Lead Unitrusts (CLUTs) and Charitable Lead Annuity Trusts (CLATs), work in the opposite direction, allowing you to donate funds to a trust that pays income to a designated charity for the specified term. At the end of the term, whatever remains is inherited by your beneficiary(ies). If any of these types of trusts appeal to you, it’s time to meet with your financial advisor so we can loop in accountants and estate attorneys.
Charitable gift annuities allow a donor to gift a lump sum to a charity for a partial tax deduction. The charity in turn pays the donor income for the rest of their life.
Pooled income funds allow multiple donors to contribute to one charitable trust for investing. Income from the fund is distributed to the donors participating in the fund AND to the charitable beneficiaries. Pooled income fund contributions qualify for a tax deduction the year they are contributed.
A charitable bargain sale allows a donor to contribute to an organization via sale of property instead of gifting cash, often in the form of real estate. To qualify as a charitable bargain sale, the property is sold to the charity at less than fair market value and the difference in value is a tax deductible gift.
Gifting Assets: You can also gift appreciated assets directly to a charity. This is an alternative to selling assets, paying capital gains, and donating cash to charity. By donating the appreciated assets, the charity receives a larger donation, and you don’t have to pay the taxes on the appreciation of the assets.
Taxes
As previously mentioned, there are potential tax benefits to charitable gifting.
Many states have an estate tax. For example, in Washington state the estate tax threshold is $2.193 million. That means that every dollar (including the value of assets such as real estate, investments, life insurance policies, art, jewelry, etc.) belonging to an estate over $2.193 million at the time of the individual’s passing will be taxed. The rate of the tax is blended based on the taxable amount. But if that individual had reduced their estate prior to their passing to an amount below the threshold, no estate taxes would be owed. Hence how gifting during your lifetime can be beneficial!
In addition to state estate taxes, there is a federal estate tax if your estate is valued over $13.61 million at the time of passing. It’s noteworthy that this $13.61 million threshold is scheduled to expire after December 31, 2025 and the exemption amount will revert to approximately $7 million, leaving more estates subject to federal taxation.
If you decide to leave all of your estate to charity upon death, your estate will not be subject to the state or federal estate tax.
You do need to keep proper records of your charitable donations. Written confirmation of a charitable donation must be provided by the recipient of the donation to satisfy IRS recordkeeping, unless the donation is made by payroll deduction.
Importantly, when filing your tax return, you choose to take the standard deduction or itemize your deductions. If your charitable donations, when combined with other deductions such as medical bills and mortgage interest, don’t exceed the standard deduction, there is no tax advantage to claiming the charitable donation. Strategizing when to make charitable contributions for tax deduction purposes is a great conversation to have with your financial advisor and tax professional.
As a final note, while gifting to individuals is subject to the gift tax when gifting above the $18,000 IRS threshold, donations to charitable organizations are exempt from the gift tax.
Gifting Responsibly
There are many considerations to be mindful of when planning to make charitable donations:
- Who/what organization are you donating to and why?
- Is a financial contribution, a donation of time/volunteering, or a combination of both the best fit for your lifestyle and budget?
- What tax implications come with your charitable donation?
- When is the best time to make your donation(s)?
- How does charitable gifting fit into your estate plan?
Some of these considerations are up to you, such as what charities you value and want to contribute to and if you want to spend time volunteering. But when it comes to creating tax strategies and estate planning, a team of professionals to lend their expertise can make a big difference.
Examples
Here at West Invest we gift both time and money to Whatcom County and Washington state charities. Various team members make monetary contributions to the Whatcom County Dollars for Scholars, the Whatcom Humane Society, and the Multiple Sclerosis Society. And members of our team volunteer their time on the boards of directors at Lydia Place (a Whatcom County non-profit organization) and the Tanzania Teaching Foundation.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.