January 26, 2022

Legacy Giving and Tax Strategies to Consider

Get your cake and eat it too! When you add charitable giving to your financial planning, doing good for others means a little extra dessert for you in the form of tax benefits. Upon giving to charities, you may be able to secure additional tax deductions that end up saving money for your heirs. Certain giving strategies may help you lower your tax liability in tandem with helping a person, cause, or organization you care about.

Still alive? Here’s how you can give…

When it comes to legacy gifts and taxes, you can expect to use certain deductions that will help you lower your taxable income in the year you give, but you can also set things in motion to help to reduce your overall estate liability down the road when you kick the bucket. Your taxable income each year will drive the narrative for this type of planning, but a properly designed giving plan will allow you to enjoy the several benefits of giving for years to come.

Two deductions are Better Than One

There are countless reasons to be philanthropic, but there are going to be certain times in your life when giving more is going to have an even greater impact on your planning.

In the years you end up earning more income than average (sale of property, bonus, inheritance, etc), consider lumping together several years of smaller planned donations into one big donation. This will give you a higher amount to deduct in those high-earning years to keep your taxable income in a lower marginal bracket.

With the standard deduction being raised by the Tax Cuts and Jobs Act, many taxpayers lost out on utilizing itemized deductions to help lower their taxable income. Now, by lumping your charitable donations together you can accumulate more itemized deductions in those high-income years and stick to the standard deduction in those normal years. The max deduction you can take with charitable contributions is dependent on several factors, but in most cases, you can deduct up to 60% of your adjusted gross income (AGI).

To accomplish this planning properly, it is important to track and estimate your income year after year and create a plan you can follow. Staying on top of the numbers will help you maximize your tax savings through charitable giving.

You Picked Some Winners, Now Give Them Away…

Selling after-tax holdings such as stocks, bonds, and real estate that have grown substantially over time will result in capital gains taxes which, when added to your ordinary income and other tax liabilities, can result in a painful bill. If you decide to donate these assets as opposed to selling them, you can effectively bypass those capital gains on your tax bill while locking in an income deduction at a high fair market value of your asset. On the other side of this transaction, the charity accepting your donation will receive the full fair market value of the asset and is not required to pay the capital gains tax either.

If you expect to have a larger than the average taxable estate, estate tax planning is important to consider. Handing off your highly appreciate assets as part of your giving plan comes with an added kicker of mitigating estate taxes which can get up as high as 40%. Removing high-growth assets from your estate (at the right times) can help you mitigate and control your overall tax liability.

Use the Correct Charitable Vehicles

Many financial institutions offer solutions that will help you maximize your charitable giving and tax deductions simultaneously. A Donor Advised Fund (DAF) is a commonly used vehicle that gives you the ability to avoid capital gains tax and better prepare estate taxes later in life. With a DAF, you contribute assets to the fund and receive a tax deduction in the year the contribution is made, then the fund grows tax-free until grants are made at your discretion. Deduction limits depend on the type of asset you are donating to the fund. With this strategy, you can intentionally time out your contributions to coincide with the high-income years benefit from a higher tax deduction and remove highly appreciated assets from your estate.

Keep your Charitable Donations Rolling Over

Tax-deferred savings vehicles such as IRAs allow you to kick the tax can down the road until the wonderful age of 72, at that point the IRS forces your hand in the form of a required minimum distribution (RMD). Under some circumstances, an RMD can taxable income into a higher marginal tax bracket, which feels even worse if you don’t need that RMD for income… But, in these scenarios, if you are at least 70½ years old you may want to consider giving away a portion or all your RMD to obtain some favorable tax treatment in return. This is strategy is what is known as a charitable rollover commonly known as Qualified Charitable Distribution (QCD). QCDs allow you to roll your RMD up to $100,000 directly over to a qualified charity and reduce your taxable income by the amount gifted.

What Will Your Legacy Be?

Utilizing different estate planning techniques through a typical will or trust planning is a common strategy for giving and leaving an impactful legacy. Philanthropic planning at the end of life can take on many shapes and sizes but one drawback is losing the double tax advantages seen during your life. However, a major benefit of a legacy gift is that you can plan for your personal financial needs first before giving assets away to others. This plan is complicated and involves legal matters that require the help of experts such as estate planning attorneys.

Give Your Retirement Plan to Charity

A tax-advantageous way to be charitable on your death bed is to name a qualified charitable organization as the beneficiary of your tax-deferred retirement plan.

When a person inherits your qualified plan, they will be subject to income tax and, depending on your scenario, estate taxes.

A recent change surrounding inherited IRAs brought on by the SECURE Act has made them less attractive for leaving a legacy. Beneficiaries can stretch distributions only up to 10 years before full distribution and tax payments are required, and this 10-year time frame also reduces the tax-deferred growth potential of inherited IRAs.

Charities are exempt from these taxes. So, leaving tax-deferred assets to a qualified charitable organization and other tax-advantaged or tax-free assets to your heirs can help reduce the tax liability of your legacy assets. Even leaving a portion of your retirement plan to charity can help secure some tax benefits for your heirs and safeguard your estate during its transfer.

Blend them together…give so you benefit today and tomorrow!

Charitable trusts can help you make an impact both during your lifetime and afterward. Depending on your scenario, there are several options to choose from. Two of the most used are charitable remainder trusts and charitable lead trusts.

Charitable Remainder Trusts

A charitable remainder trust (CRT) is a type of irrevocable trust that allows the grantor, or owner of the trust, to transform highly appreciated assets into an income stream. The grantor receives a tax deduction upon the asset transfer, avoids capital gains taxes when the asset is sold, and can help curtail estate taxes in the future. Once the grantor (or the grantor’s chosen non-charitable heirs) dies or the term of the income stream is over, the remaining trust assets go to the qualified charitable organization(s) selected by the grantor.

Charitable Lead Trusts

A charitable lead trust is an irrevocable trust that is the opposite of a charitable remainder trust. A CLT pays an income stream out to a qualified charitable organization for a set period, and when that term is up, hands the remaining trust assets over to the grantor’s heirs. The grantor receives a tax deduction for the present value of the income stream donated to charity and can remove highly appreciated assets from the estate and transfer assets to heirs without any gift or estate tax consequences.

Working with an Advisor

While all these charitable giving tax strategies have benefits, it may not be easy for you to recognize the best time to employ them or decide upon which strategies work best in your situation. Working with a trusted financial, tax and estate planning professional can help you craft the optimal giving strategy to maximize your philanthropic goals and tax savings during your lifetime and beyond.

Contact us today to speak with an advisor!

Advisory services are offered through Foundations Investment Advisors, LLC, an SEC-registered investment adviser.

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