#CLT

You may donate money to charitable organizations throughout the year, for no other reason than your heart-felt desire to support causes that you care about. But if philanthropy is important to you, keep in mind that the associated tax breaks could potentially increase your ability to give. You might consider a more strategic approach to charitable giving, possibly as part of your year-end tax planning.

You can generally deduct charitable contributions, which reduces your taxable income, only if you itemize deductions on your federal income tax return. The deduction is currently limited to 60% of your adjusted gross income (AGI) for cash contributions to public charities. Otherwise, limits of 50%, 30%, or 20% of AGI may apply, depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.

If you claim a charitable deduction for a contribution of cash, a check, or other monetary gift, you should maintain a record such as a cancelled check, a bank statement, or a receipt or letter from the charity showing the name of the charitable organization and the date and amount of the contribution. Donations of $250 or more must be substantiated with a contemporaneous written acknowledgment from the charity. Additional requirements apply to noncash contributions.

Here are some strategies that may help enhance your charitable impact as well as your tax savings.

Bunch or time gifts and deductions

The Tax Cuts and Jobs Act roughly doubled the standard deduction beginning in 2018 and indexed it annually for inflation through 2025 ($12,950 for single taxpayers and $25,900 for joint filers in 2022). The result was a dramatic reduction in the number of taxpayers who itemize, now only about one out of ten.¹

If you find that the total of your itemized deductions for 2022 will be slightly below the level of the standard deduction, it could be worthwhile to combine or “bunch” 2022 and 2023 charitable contributions into one year, itemize on your 2022 tax return, and take the standard deduction on 2023 taxes.

Another option is to increase your charitable giving in years when you expect higher annual income. For example, charitable deductions could help offset the tax liability resulting from a business sale, capital gains, stock options, or a Roth IRA conversion.

Utilize a donor-advised fund

Another way to bunch contributions or generate a large charitable deduction for the current year — possibly before you know where you want the money to go — is to open a charitable account called a donor-advised fund (DAF). Donors who itemize deductions on their federal income tax returns can write off DAF contributions in the year they are made, then gift funds later to the charities they want to support. DAF contributions are irrevocable, which means the donor gives the sponsor legal control while retaining advisory privileges with respect to the distribution of funds and the investment of assets. DAFs have fees and expenses that donors giving directly to a charity would not face. (Note: BFSG can assist you with opening a DAF.)

Donate from an IRA

If you are an IRA owner who is 70½ or older, you can give to charity without itemizing and still get a tax break through a qualified charitable distribution (QCD). A QCD must be an otherwise taxable distribution from an IRA (generally, distributions from traditional IRAs are subject to federal income tax). QCDs are excluded from income and won’t affect your tax obligation. Moreover, once you reach age 72, a QCD can satisfy all or part of your required minimum distribution. To make a QCD, you would direct your IRA trustee to issue a check made out to a qualified public charity. You may contribute up to $100,000 from your IRA; if you’re married, your spouse may also contribute up to $100,000 from his or her IRA.

Consider a charitable trust

With a charitable remainder trust (CRT), you can donate money, securities, property, or other assets to the trust and designate a beneficiary — even yourself — to receive the income. Upon your death (or the death of your surviving spouse or designated beneficiary), the assets in the trust go to the charity.

Although the annual trust income is usually taxable, you may qualify for an income tax deduction based on the estimated present value of the remainder interest. Once assets are in the trust, the trustee may be able to sell them and reinvest the proceeds without incurring capital gains taxes.

Assets placed in a charitable lead trust (CLT) pay income to the designated charity until the trust ends (typically, upon your death). The remaining assets would then be returned to your heirs. This strategy might help reduce estate and gift taxes on appreciated assets that go to your heirs.

Both types of trusts are irrevocable, so assets cannot be removed from the trusts once they are donated. Not all charities are able to accept all possible gifts, so it would be prudent to check with your chosen organization in advance. Trusts incur upfront costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of experienced estate planning, legal, and tax professionals before implementing trust strategies.

Strive for effective giving

With so many nonprofit organizations seeking financial support, you may want to direct your money where it can do the most good. Here’s how you can help ensure that your donations are well spent.

Give directly to the charity.

Individuals who call on the phone or knock on your door are likely to be paid fundraisers, which can cut into the organization’s proceeds. Even worse, they could be questionable groups posing as more reputable and well-known charities. When contacted by fundraisers, never give out personal information over the phone or in response to an email you didn’t initiate. There’s no rush — take time to vet the charity before you donate.

Check out the charity’s track record.

There are several well-known “watchdogs” — such as CharityNavigator.org, GuideStar.org, and CharityWatch.org — that rate and review nonprofits. These organizations provide information that can help you evaluate charities and make wise choices. Find out how your gift might be used by looking into the charity’s mission, plans, and financial status. Charities with higher-than-normal administrative costs may not be spending enough on programs and services — or they could be in financial trouble.

Take advantage of “leverage” opportunities.

A wealthy benefactor or corporation may offer to match private donations to a charity during a certain window of time, and some employers have charitable giving programs that match funds donated by employees to qualifying organizations.

Sources:

1.  Internal Revenue Service, 2022

Prepared by Broadridge. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

(This is part 4 of a four-part estate planning series)

In the previous posting, we discussed how Mark Zuckerberg of Meta Platforms, Inc. had the same strategies available, that you have available in order to reduce or possibly eliminate your estate tax bill.  In this final part of the estate planning series, we would like to review how gifting assets from your estate can be beneficial to your estate tax bill. If you have concerns regarding how these strategies could affect certain estate and gift planning transactions in which you intend to engage or have previously engaged, please contact your tax advisor and estate planning attorney to further discuss your estate and gift planning inquiries. Our firm is happy to work with you and your estate planning attorney on your unique situation and we can work together to help you achieve your estate planning goals.

During my CFP® studies, one of my professors quipped, “Some people are charitable by choice, but some people get to a certain level of net worth and are charitable by necessity.”  This means that even though some people aren’t charitably inclined, it may be best for their bottom line to be charitable for their own sake and/or their heir’s sake.

The Charitable Remainder Trust (CRT) and the Charitable Lead Trust (CLAT)

I’ve lumped these two strategies together because they generally both gift assets to charity and get assets out of the estate, but one pays the charity in a lump sum and the other pays an annual income stream to the charity over a stated number of years.  When a Charitable Remainder Trust (CRT) is funded, income gets paid to the beneficiary(ies) at least annually for a set number of years and the charity gets the remainder. The Charitable Lead Annuity Trust (CLAT) (sometimes referred to as just a Charitable Lead Trust) is structured where income gets paid to the charity over a stated number of years and afterward, the beneficiary(ies) gets the remainder. Both trusts are irrevocable and serve the purpose of lowering your taxable estate. The CRT allows for an immediate charitable deduction when you fund the trust, while the CLAT allows the estate to take a charitable deduction for the value of the interest paid to charity.

Here are some graphical examples of how a Charitable Remainder Trust and Charitable Lead Annuity Trust work:

Charitable Remainder Trust (CRT):

Charitable Lead Annuity Trust (CLAT)

Superfunding 529 Plans

The 529 plan is an investment account typically used for college planning that allows for tax-free growth and possible tax-free distributions if those distributions are made to pay for qualified educational expenses. One strategy that is available to you is using the annual gift tax exemption of $16,000 per person per beneficiary since (as we discussed in part 1 of this series) this is typically the maximum that you can gift without triggering the gift tax and having your gift tax exclusion reduced. However, we can do one better. You can “superfund” a 529 plan by making five years’ worth of gifts in one year.  Therefore, we can gift $80,000 per person per beneficiary (or if you are a married couple, you can use gift splitting and instead gift $160,000 per beneficiary) all without triggering gift tax and while getting that $160,000 out of the estate. Notice that the definition states: “per beneficiary”. The catch is that you need to live at least 5 years after the gift is made for it to have successfully left your estate. After the first five years are completed, you can do it again if you wish. If one of the 529 plan beneficiaries decides not to go to college, you can always change the beneficiary at any time, or even make a once per year rollover of 529 plan assets to another 529 plan beneficiary’s account.

529 Plan Superfunding Example:  Say you have six grandchildren, and you are benevolent Grandma and Grandpa. You want to superfund their 529 plans, so you then make a gift of $160,000 to each of the six grandchildren to their 529 plan accounts (for a total of $960,000). You wait 5 years and do it again, but unfortunately, passed away 2 years later. The first $960,000 that you gifted will be out of your estate. But the second time you tried to superfund their 529 plans for the second $960,000, it will be counted in your gross estate. In this example, there was still $1,920,000 contributed to the six grandchildren’s 529 plans and $960,000 left in your gross estate – all without triggering any gift tax.

In summary, there are many different estate planning strategies that can help reduce your overall income tax burden. If you would like to revisit any of our prior posts in this estate planning series here are the articles for easy reference:

• What is the Estate and Gift Tax
• Getting Assets out of the Estate
• Getting Future Growth out of the Estate

Furthermore, earlier this year we posted a white paper, “2022 Estate and Gift Tax Planning”, that discussed making gifts to children and grandchildren during 2022 while incurring little or no gift tax.

The bottom line is we are happy and willing to work with you and your estate planning attorney on your unique estate planning goals.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.