As the calendar year begins to wind down, many of us start to think about charitable donations and year-end gifting. Additionally, the economic impact of the coronavirus pandemic has further highlighted attention on timely charitable giving. However, all-too-often the busyness of life gets in the way of thoughtful gift planning and donations are rushed at the last minute simply to meet a tax deadline rather than being strategically planned so as to maximize both the deduction and philanthropic benefits of the gift. For those with philanthropic priorities and interests, a well-developed philanthropy plan should be a core part of one’s overall financial plan.
With the changes coming in Washington, uncertainties surround the future of personal income tax rates, the step-up in basis rule and the federal estate and gift tax exemption. It is widely agreed, however, that taxes are likely to go up. The country has to pay for stimulus bills and loan forgiveness programs. In other words, the current environment is favorable to many types of wealth transfer, due to low interest rates, high estate tax and gift tax exemptions and lower tax rates for many.
One can make a compelling case that while interest rates are low but expected to rise over time (and by extension the IRS “7520 rates” which are used to value annuities and the deduction value of many types of charitable gifts), there are many compelling reasons for donors to revisit or begin their philanthropy planning now. There are many available techniques.
Gifting highly appreciated assets like shares of stock rather than simply giving cash can accomplish multiple objectives: avoid capital gains taxes, help rebalance an investment portfolio, and at the same time help support a worthwhile organization.
Holders of an IRA account who have attained age of 72, but do not need or want to take the annual taxable income, can consider a Qualified Charitable Distribution (QCD). Made permanent in late 2015, this provision allows an IRA holder to make a direct gift from an IRA to a charity. The distribution can be used to fulfill the required minimum distribution (RMD) and help the charity, but this contribution does not also count as an itemized deduction.
Do you want to help a charity out but still need income? In this instance a strategy like a charitable gift annuity or charitable remainder trust may be appropriate. Both of these techniques generate income for the donor but leave what’s left in the trust to a charity upon the donor’s passing.
Alternatively, perhaps you wish to reduce taxable income but still desire to support your favorite cause while also efficiently transferring valuable assets to your heirs. A charitable lead trust (CLT) can help accomplish these multiple objectives. A CLT is a charitable giving vehicle that makes lead payments to a charity for a term of years or the donor’s lifetime and then pays the remainder of the trust to one or more persons, typically family members of family trusts. The legal and tax nuances surrounding CLT’s are quite complicated, so expert counsel should be sought in order to thoroughly explain the benefits and/or drawbacks. Properly planned and executed, a CLT can be an efficient way to help a charity but also transfer assets for estate and gift tax purposes.
Perhaps your goal is to donate after you’re gone a portion of what’s left of your personal estate. In this instance a bequest or designating a charity as the beneficiary of your IRA may be methods worth considering.
With the passage of the SECURE Act in early 2020, children are limited in their ability to stretch-out inherited IRAs from their parents. Under the new rules, an IRA can be stretched for a maximum of ten years during which time the investments must be liquidated and tax paid. A creative solution allowing a longer stretch-out is the use of charitable remainder trust (CRT). By designating a CRT as the beneficiary of your IRA, you can provide an income stream to your children for a much longer term, with the remainder going to charity. If you have a taxable estate for federal estate tax purposes, this plan will also allow a charitable contribution deduction.
The gift planning process itself can be a tremendously rewarding exercise. Whether done as a family or individual, clarifying the purpose, importance, timing and type of philanthropic priorities can be extremely meaningful. What types of causes or organizations are important to the individual or family? Are there specific programs within those entities of most interest or just the general work? Do you wish to be personally involved with the organization or the spending oversight? Do you have the desire or ability to begin donating now, or will your gifts be posthumous? Do you want recognition for your gift or do you wish to remain anonymous? These are just several of the important questions which should be addressed as part of a philanthropy program. Identifying the goals and purposes behind the philanthropy first enables a more specific discussion of what type of assets and technique are most appropriate.
Contributed by Andrew E. Crowell of D.A. Davidson & Co. and Five Acres Legacy Society member and Kelley Bannon Lashley of Deka Law Group and Five Acres Legacy Society memberAndrew E. CrowellKelley Bannon Lashley
