Charitable Giving: Combining Purpose with Potential Tax Benefits

Hello, I want to welcome you to our webinar related to charitable gifting. Given the season, we at Sam felt it was the perfect time to address this important topic and provide you with the tools and information necessary to make a well-informed decision. My name is Chris Gilmore and I am a CFP, Certified Financial Planner and a Senior Wealth Manager with Stansberry Asset Management. I'll be your host today. Today, we're going to discuss a variety of items including giving to individuals and how that might differ from charitable giving, what type of assets you expect to gift, and the impact that may have. I also want to discuss different methods of giving as well as strategies for evaluating charity. So we're going to cover a lot, so let's get going. So gifting to individuals, this is obviously different than gifting to charitable organizations. You can gift, frankly, among other things, to any number of individuals. Interestingly, for 2024, the exclusion amount is $18,000 per recipient and $36,000 for a married couple. What this means is that you can give up to $18,000 per recipient and $36,000 for a married couple. What this means is that you can give up to $18,000 per recipient. Or if you're married, $36,000 to any individual. Or if you're married, $36,000 to any individual that you so choose. It could be a child, it could be a nephew, it could be a neighbor, whatever you wish. This is going to change next year in 2025 when the number goes up to $19,000 per recipient as an individual gift and $38,000 for a joint gift. Now again, unless you exceed the $18,000 bogey, you do not need to report to the IRS. If you do exceed that $18,000 bogey in 2024, you'll need to file a form 709. So please consult with your CPA. Interestingly, for qualified educational expenses and for medical expenses, payments made directly to the institution don't count as gifts. So again, to the degree that impacts you, please know that you can gift to your heart's content if you pay directly to those entities. In addition to the annual exclusion, there's something called a lifetime exclusion. So if you are a taxpayer in the United States, you qualify for a lifetime gift tax exclusion of $13.61 million as an individual. I know it's a lot. If you're a married couple, it's $27.22 million for that married couple. Any amount exceeds this max exclusion will potentially be subject to gift tax paid by you, the donor? Know that this is currently set to expire in 2025. It might revert back to the 2018 level of $5 million unless extended. Honestly, I believe that it will be extended in 2025, but we will see. So what are we going to cover today? Well, first, I want to talk about why contribute to a charity in the first place. And then we'll review what you're gifting. And is that going to be cash? Is it going to be non-cash? Is it going to be stocks, real estate? What is it going to be? And each one of these has its own limitations. Then what I want to do is review different methods of giving, some of the more tax advantage structures that might exist. And if you do indeed want to gift in the form of a legacy, what might you do? And then finally, I want to properly evaluate charities and give you some tricks and tips to do so. So let's start with why donate to a charity? Well, what's your motivation is really what it comes down to. Are you inclined personally towards charitable gifting? Is it more of a societal thing? Well, one of the more important criteria for gifting, sadly, maybe, is the tax advantage that you get from gifting. So anytime you give to charity, you can reduce your taxable income and potentially eliminate capital gains. As you're likely aware, taxpayers have a standard deduction, which depends largely on your income level. So it's a good idea to talk to your CPA when you're considering charitable gifts. It may be better off. You may be better off claiming the standard deduction for filing status if that standard deduction is more than the total amount of your itemized deductible expenses. And therein actually lies a pretty important point. You need to itemize your deductions in order to fully benefit from the charitable giving. Beyond the tax advantages, there's a sense of fulfillment. That you get from charitable giving. So if you want to contribute to a cause that you care about, certainly there's an element of value related to that. Or maybe you just want to build a legacy. You've had a very successful career. And here's a strategy for giving back after you're gone. If you want to benefit society, on the other hand, just supporting an educational entity. Maybe it's your alma mater that you're really close to or not that close to. But you want to leave a lasting impact on that organization. Maybe it's some healthcare issue that's near and dear to you because you may have lost someone along the way to a health issue. Maybe it's humanitarian effort. There's there's countless entities that will benefit from your goodwill. So your ability to get out there and contribute to these nonprofit organizations allows them to carry out their missions. So what are you gifting? Here is an important part of the process because the nature of your gift will impact the tax advantages for you. So we'll start with cash donations. For donations meaning cash or cash equivalents, credit cards, checks, what have you, you can typically deduct 60% of your adjusted gross gross income per year. So that means that if you make $100,000 in a given year, you can deduct up to $60,000 if you were to contribute that to a charitable organization. Non-cash donations are a little bit different. Things like clothing, household item, I don't know, maybe furniture, cars, collectibles. You can generally deduct 20 to 50% of your AGI depending on the type of property. Donations can also be based on full market value. the amount of deductibility. For cost basis, it's generally far more than it is for full market value. So if you had a security that perhaps you had bought at $100 and it had bounced around that $100 level, making that contribution, you might want to deduct the cost basis versus the full market value related to that. A state gift is, generally speaking, a charitable donation made through an individual's estate, such as a will or a trust. They're deductible from the value of the estate, so it can be a great estate planning tool. It can reduce the estate planning tax burden for, or the estate tax burden for your beneficiaries. So a very good potential strategy in the long term. In most cases, gifts to charities, I'll say, made during the donor's lifetime are not subject to gift taxes, provided the donations are made to qualifying charitable organizations. So keep that in mind. What happens if your contributions exceed the annual limit? For example, 60% of your AGI, the excess can often be carried forward and deducted over the next five years, subject to the same percentage limit. So we'll get into more detail on that in a moment when I give you an example. But what I want to say here is please pay attention to your state-specific rules. It's important to note, each state may have different rules related to charitable gifting, including separate tax deductions or credits, limits, eligibility requirements. There might be issues related to income taxes that you have to address. Check state-specific rules in addition to federal guidelines related to gifting. Always check with your CPA. Again, that will be a recurring theme here as they are the ones that are more intimately involved with your tax situation. Let's review donation of appreciated assets. When you sell appreciated assets, you may be required to pay capital gains tax on the increase in value. What makes charitable gifting great for stocks and real estate or any highly appreciated asset is you can avoid these capital gains on these appreciated assets by donating directly to the charity of your choosing. In addition, you can often deduct a portion of the fair market value of the donated asset from the taxable income that you might have in a given year up to, again, 30% of adjusted gross income, which is nice as it allows you to give more at a reduced tax burden. So what does this look like? Well, suppose you itemize your taxes and your adjusted gross income from the year is $100,000. You donate appreciated stock worth of $50,000 in that same year to a public charity that allows you to deduct 30% of AGI. Because the limit for this appreciated property is 30% of AGI, in most cases you can only deduct $30,000 of that $50,000 donation in the current year. But your taxable income goes from being $100,000 down to $70,000. And that's nice. What happens to the excess though? Well, if the donation exceeds the limit, example, you donated $50,000 but the limit is $30,000, the remaining $20,000 can actually be carried forward and applied as a deduction in future years for up to five years. So it doesn't go away. So you know that it will remain out there until you use it up entirely. So there are key limits that I just want to review really quickly here. We just went through them, but again, they're so important that I'm dedicating another slide to them. Cash donations, which is pretty simple, up to 60% of AGI. Non-cash donations, clothing, household items like furniture, cars, and so forth, collectibles. 20% to 50% of AGI, depending on the property. Appreciated assets, usually between 30% to 50% of AGI, depending on the type of charity. 50% generally may apply to churches and schools, foundations, that sort of thing. And whether you use the full market value or the cost basis for the gift. Excess contributions, importantly, can be carried forward up to five years. So let's go through some methods for planned giving. So a bequest. Most people have heard of it, but you may not be familiar with exactly what it is. Well, the definition of a bequest is a specific type of planned gift that is included in your will or in your trust, designating assets to a charitable organization after death. The key features, generally speaking, is a specific type of gift that is included in your will or in your trust. The key features, generally speaking, are that it's pretty simple to arrange. You really just lay it out in your will or in your trust, and it will be taken care of. You can generally leave a lasting legacy without impacting your current finances. So it won't impact you in the immediate term, but it can be an excellent tool for leaving legacy. Common forms include a fixed sum. So $10,000 to XYZ charity. A percentage of the estate. I'm going to leave 20% of my estate to XYZ charity or specific assets. You reduce the estate tax burden, which is really nice to your heirs. So based on where you live and how much you leave behind, you can really do a lot for that charitable entity and do a lot for your beneficiaries relative to the gift that you leave and the value of that gift relative to the estate taxes. So another form of giving is through what's called a donor advised fund. And frankly, this is one of my favorite methods of charitable giving. It allows you to make charitable donations now, receive a tax deduction now, but distribute the funds to your favorite charities at a later date. So there's no immediate need to do it. If you just utilize highly appreciated assets, generally speaking, in this vehicle. You can, of course, put cash in there as well, which will impact the amount that's deductible. But generally speaking, it's excellent for putting highly appreciated assets into a vehicle that will ultimately be able to distribute how and when you like to whichever charities you like. So you get that immediate deduction for the contribution, even if the actual charitable grants don't happen for years. You avoid capital gains tax. Again, as I emphasize, you use highly appreciated assets when you donate those, whether it's stocks, bonds, real estate or cryptocurrency. Even you can avoid those capital gains tax that you would have incurred if you had just sold the asset. So you get tax deductions up to 30% of AGI for appreciated assets. And if you were, as I mentioned a moment ago, to contribute cash to this account, it's actually 60% of AGI. Then you get tax-free growth within this vehicle, which is fabulous. So the money that you park in this vehicle, you can have managed and it grows tax-free, allowing your future charitable donations to be met by an investment that you made years ago. So why a donor advised fund? Well, I love the flexibility. You maintain control. You maintain anonymity over and when the charity receives the benefit of your donor advised fund. And you also control how much is distributed. So it's a very, very flexible vehicle. It's very simple to administer. DAF is generally handled by an administrating firm that handles all the compliance, the paperwork, the charitable giving. So you know and you can verify what charities are in line with your expectations. This is all managed by the sponsoring organization. We here at SAM, for instance, we partner with a firm called REN, which is a top tier administrator for donor advised funds focused on streamlined the operational elements of giving. So legacy giving. So legacy giving is another feature of a donor advised fund that can be compelling. Donor advised funds can be established in a way that you can name successors or advisors to the fund that will allow the next generation to continue your philanthropic efforts long after you're gone. So it is a compelling solution from that perspective. Another vehicle that folks find compelling is what's called qualified charitable distributions. And these come from IRAs. Now, a qualified charitable distribution or a QCT is a tax -free donation from your IRA to a qualified charity. And it can be up to $150,000 per owner in 2024. Excuse me, $105,000. My apologies. $105,000 per owner in 2024. The $105,000, I will say this is expected to go up next year consistent with inflation. You become eligible for a QCD at 70 and a half. And you must be this age on the day that the QCD is initiated or older, of course. But it's nice if you need to be taking RMDs, which will happen at age 73 and you don't really need the money. So for me, this is an excellent tool for gifting those assets. If you are over age 73, qualified charitable distributions can count towards your RMD. And a qualified charitable distribution is not included in your taxable income. It's not added to adjusted gross income and it does not show up on your 1099-R form. Interestingly enough, it could mitigate surcharges to monthly Medicare premiums. It may also call you themselves $70,000, which are somebody's thousand current you. Continue with QCDs. To qualify as a qualified charitable distribution, the money must go to a 501c3 organization like any other charitable contributions. IRA custodians will require you to fill out a form requesting the charitable payout. So you'll consult your advisor. He will contact your charity. He will contact your custodian and will organize the payment. The check can be sent either directly to the charity or made out to a charity, excuse me, made out to the charity and sent to the donor. So you have a couple of different options there. I will point out that while 401ks, 403bs and other qualified plans may have required minimum distributions, you cannot use them for QCDs, which is a real problem as far as I'm concerned. I think IRAs offer a lot more in terms of certainly these and different solutions. But I will note that always check with your CPA to receive rules related to QCDs in your state. If you're still making deductible IRA contributions after age 70, half, in other words, you're still working, those contributions may reduce the eligible tax-free portion of the QCD by the deductible amount. So if you are still working and making IRA contributions, it may reduce the benefit until those contributions are used up in future years. Now let's move on to a little bit more of a complicated gifting structure. Charitable gifting through trust. So I'm going to start with charitable lead trust. These are CLTs. And basically, these are structured to move assets outside of an estate to a trust that pays income to a charity for a designated period of time. Afterwards, the remaining assets are passed to the heirs. There's frankly two different types of this. There's the grantor CLT and the non -grantor CLT. With the grantor CLT, the donor takes income tax deduction for the present value of the charity's expense. The benefit of the protected income stream. The difference with the non-grantor CLT is the trust is taxed, not the donor. The trust is taxed. The donor doesn't receive immediate tax deduction, but assets move outside the estate, thereby avoiding estate taxes. The benefits, there can be material estate tax reductions. Also, there is an income tax reduction for grantor CLT. You will benefit the charity, obviously. Potentially, potentially in a material way when you are alive, which is nice. And depending on the terms, it can be an effective way to transfer wealth with a reduced gift or estate tax liability, which is always nice. I want to emphasize this last point. For any trust, especially this and the next trust strategy that I'm going to mention, please make sure that you engage with reputable estate planning. If you don't have one, Sam would be happy to make an introduction to a firm that you may wish to consider. So moving on from charitable lead trust to charitable remainder trust. Charitable remainder trust, or a CRT, provides income to you or your beneficiaries for a set period. After the trust term ends, the remaining assets in the trust go to the charitable organization, hence the charitable remainder. Realization can be $1.995 billion. It's a fixed tax cuts of credit. The charitable deposit. The charitable donation can be either for a fixed number of years or for the lifetime of the beneficiary. It really is up to the trust documents and how it's drawn up. So again, like the CLT, with the CRT, there's two types. There's what's called an annuity trust and a unit trust. The annuity trust pays a fixed amount to beneficiaries each year based on the initial value of the trust. Unit trust is a little different. It pays a fixed percentage each year, which usually can amount to about 5% to 7%, whichever is drawn up, again, in the trust documents. This will be recalculated annually. So the benefits here are, well, first, there's an income tax deduction for the present value of the payment to the charity based on the inception value. You can avoid, which is nice, capital gains tax by donating appreciated assets. You also create income for beneficiaries for whatever the designated period is. Again, those will be drawn up in the trust docs. Generally, there will also be estate tax benefits as assets are moved outside of your estate. So a variety of benefits associated with this CRT structure. So when do you want to use a CLT versus our CRT? Well, with a charitable lead trust, it's best for individuals who want to benefit the charity immediately through income during the trust term. I'll say this. Well, they want to be passing their wealth onto their heirs at a reduced task cost. So this really accomplishes that. It's ideal if you're looking to reduce estate taxes and preserve the wealth for your family after that set period of time. Charitable remainder trust, again, structured a little bit differently. It's ideal if you want to receive income from a charitable trust for yourselves or for others for life or for a set term while ultimately benefiting the charity. It's excellent for individuals looking to avoid capital gains tax on appreciated assets. And receive charitable tax deduction. I will say this again. It can be quite complicated. So please consult with that estate attorney, estate attorney that I referenced earlier. So how do you evaluate a charity? Well, there's a variety of ways. But what you should consider when looking at is first, make sure that it's the 501c3 organization. Then you want to consider the financial health of the charity. Then you want to consider the financial health of the charity. And to do so, you look at the charity's expenses and how much is spent directly on programs. Reputable charities, I'll tell you this, generally range between 65 to 75 percent on their programs. Then you want to evaluate the efficacy and the results that you're seeing from the charity. Consider qualitative methods such as interviews with the benefit. Ask them, you know, you know, why they started working with the charity and what they've seen. And to the degree they can be straight with you about the pros and cons associated with the organization. Take that to heart. Also, I would talk to the staff. Oftentimes they have insights that you wouldn't otherwise expect. Then lastly, I would talk to volunteers. But most importantly, you might want to volunteer yourself with a given organization as that will give you some direct insights. I do want to emphasize you make sure that you document everything for the IRS. The IRS requires proper documentation for all charitable donations, particularly larger gifts and non-cash donations. This may include receipts, any appraisals that you get or any written acknowledgements related to the gift. So to wrap up, while we here at Sam want nothing more than to be your trusted advisor relative to your wealth management, we are not tax advisors. Always speak with your CPA relative, always relative to tax sensitive issues, because you want to receive a sense of what makes the you want to get a sense of what makes the most, what is best for you relative to your specific circumstances and your CPA. And your CPA will have a sense of what makes the most, what makes the most, what makes the most, what makes the most, what makes the most, what makes the most, what makes the most, what makes the most, what makes the most? Or if you need qualified charitable donation information, we can always provide that and we can provide guidance as well. When you determine a charity that you want to have a digital access to, These are a few websites that I've used in the past that are very valuable. So Charity Watchdog Group at charitywatch.org. Or if you're looking for research on individual charities, look at givewell.org. Or lastly, if you need data related to certain charities, I found charitynavigator.org is an excellent tool. So if you are interested in opening a donor advised fund, again, please feel free to reach out to us. If you are an existing client, please feel free to call your wealth manager or you can scan this QR code right here. And it will take you to a website where you can put in your information and we'll reach out to you and we can address whatever questions you have. Likewise, if you're not a SAM client, please feel free to use this QR code to indicate your interest. If you are a non-SAM client, I will say that we do have a minimum relationship size of $500,000, which clearly doesn't need to go all to a donor advised fund, but that would be part of it for sure. And then lastly, we are working hard to create content that we believe all investors, whether they're SAM clients or non-SAM clients, will find valuable. So if you want to stay abreast of some of the key insights with respect to investments or varied strategy and or wealth planning, please feel free to follow us on any of these social media sites. Thank you for your attention and please feel free to reach out to any of us here at SAM with questions. Have a great day.