How to Make Charitable Giving Part of Your Financial Plan

tax efficiency, charitable giving, [PARTNER FIRM]

COVID-19 caused an economic shockwave that we’ll feel for a long time. Nonprofits, from large global networks to the local churches, have been hit hard, too. In a recent survey of 110 nonprofits, 80% of them said revenue had fallen across the board.

For the charitably-inclined, 2020 is an important year, a critical time when your generosity could make a significant impact. When done strategically, charitable giving can benefit not only the recipient but also the giver’s tax situation.

Individuals make up 70% of philanthropy in the world. Just people, having a conversation with themselves and their families and deciding how to express themselves by giving.

You make the rest of your financial plan with serious intention and strategy, and you use various vehicles and techniques to execute that plan. Do you set up your charitable giving with the same energy and intention?

What are the financial planning tools for charitable giving that make this universal impulse work best for the recipients and the donors? Let’s look at those today.

Give with a Donor-Advised Fund 

A donor-advised fund (DAF) is a powerful financial planning tool for charitable giving that offers you some measure of control as to how and when the donation will be made. You can deposit money into the account now, receive the tax benefit and then make the donation in your own time.

There’s no time limit on when you need to make the donation. It just has to be given to a qualified 501(c)(3). For example, you can deposit $100,000 now, receive the tax benefit and then give it to your church at $10,000 a year over the next decade. The tax benefit will come to you upfront, the money can grow in the fund, and you won’t be hit with capital gains on its way out.

One of the goals of financial planning is to give you control over your finances, rather than just reacting to what happens. This is where the “time-travel” element of a DAF is especially helpful. You could place the money in the account now and let it grow, then make a charitable decision as a family over the holidays. Or, if you have a “windfall year,” with an inheritance or business sale, you can put money in a DAF to reduce your tax footprint for the year.

Take Stock

Highly appreciated stock is another possibility to deposit into your DAF. The capital gains tax losses on this kind of appreciation – think company stock from a 30-year career – can be pretty painful. You can move these large stock holdings to a DAF, get the tax break and then use the money to tithe or make donations every year through your retirement.  

Read more here: How to Maximize Your Giving with a Donor-Advised Fund 

Give Your Required Minimum Distributions 

If you’re 72 or older, required minimum distributions (RMDs) are kicking in. These mandatory distributions from your retirement accounts are essentially a tax vehicle – the government didn’t get any taxes when you contributed, so they will get them when you withdraw. Your tax footprint for the year can grow substantially, depending on the size of your retirement accounts.

One of the most underused financial planning tools for charitable giving is connecting your RMD to a qualified charitable donation (QCD). You can transfer this mandatory withdrawal directly to a qualified charity, and avoid the tax loss to yourself or to the charitable recipient. One of the best ways to use this technique is with the giving you’re already doing.

For example, Gladys just turned 72 and has been talking with her advisor about her upcoming RMDs, which come out at about $70,000 per year. She has faithfully given $50,000 annually to the United Way for most of her working life as a personal goal. To give that much, Gladys has always had to take out well over that amount from her other accounts because of the tax loss involved. With the RMD to QCD connection, she can transfer the full $50,000 without incurring taxes on the transfer.

Give in Your Estate Plan

When people sit down to work out their estate plan, I often start the conversation with a tongue-in-cheek question. There are three choices as to where your money will end up: with your benefactors, charity or the U.S. government. Which do you choose?

I’ll let you guess which two are the most popular!

Estate taxes are an irritating reality when it comes to leaving a legacy, and planning is vitally important. The sad story of the performer Prince, who left almost half his fortune to taxes, is a cautionary tale. Thinking ahead of time will help you avoid the tax loss for your loved ones and the causes you hold dear.

An irrevocable trust is a great estate planning technique that helps you avoid tax losses when the money is passed on and take a tax benefit now. More money will go to your benefactors and/or charities, and less will go to the government. Setting up a family charitable foundation offers similar benefits, and lets your loved ones choose where the donated funds will go and on what timeline.

Another important maneuver you can make is converting your IRA to a Roth account. When converted, the money is no longer taxable no matter the growth. You will incur taxes in the conversion process, but you can pay them before it becomes an issue for benefactors or charities.

Give in these Uncertain Times

As charitable groups have suffered in 2020, a consequence of the pandemic and resulting economic activity, now is the time when your financial gift could have a sizeable impact. You could not only help your favorite charities not just bankroll next year, but survive this one. This may be a year to consider bundling donations to reach tax thresholds as part of your strategy – a benefit to both of you.

Give Effectively 

These are just a few of the financial planning tools for charitable giving you can use to give more and protect more of your assets. Approaching charity like you approach the rest of your financial plan helps you be more effective and intentional about the giving you’re already doing.

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