Thinking beyond a cash donation
Maximizing year-end charitable giving while minimizing taxes
By Eric Braund, CFP®, CRPC®
Traverse City Business News, October 2017 issue
The holidays are often a time to reflect on what you are thankful for, as well as how you can help those in need. Typically, you might simply donate cash to your favorite charity. This year, however, consider exploring four alternatives that allow you to give just as much while protecting your assets from excessive taxes.
Giving appreciated securities
Giving appreciated securities (publicly traded investments) from your portfolio rather than cash can be a significant savings. If you purchased a security some time ago and would realize capital gains by selling this security, then you should consider this option. Every year, I work with clients to determine what security or securities they should gift to charity. By choosing the direct gifting route, you can remove the appreciated security from your portfolio (which allows you to rebalance your account) without incurring any capital gains tax, as well as receive a tax deduction for the donation. Once the charity receives your donated security, they can sell it without any capital gains tax (assuming they are a non-profit organization).
Donating complex assets
The same strategy of donating appreciated securities can be applied to more complex investments, such as private company stock, restricted stock or even real estate, to name a few. However, when gifting more complex assets that are not publicly traded, the process requires much more time and effort. It also involves additional laws and regulations that should be discussed and reviewed in advance. Lastly, many charities do not have the administrative resources to handle a complex donation, but there are some solutions that can be used to help facilitate this transaction.
Making a qualified charitable distribution from an individual retirement account
Making a qualified charitable distribution (QCD) from an individual retirement account is another great choice if you are over the age of 70 ½ and making required minimum distributions (RMD). You can donate some or all of your RMD to charity, satisfying both your charitable goals and your Required Minimum Distribution without tax consequences.
Making a QCD can be beneficial to those who are not able to itemize their deductions either because they fall below the standard deduction threshold or their income is too high where they would phase out of charitable deductions. If you choose this option, you will need to make sure the distribution is not made out directly to you but rather directly to your charity. In addition, it’s important to note that total QCD is limited to $100,000 per year.
Establishing a donor-advised fund
Establishing a donor-advised fund can be useful by allowing you to separate charitable gift decisions from actual tax planning. A donor-advised fund will allow you to make a gift and take the tax deduction immediately, but determine the charity to support at a later date. If you know you are charitably inclined and plan to make donations in the future but are unsure which organizations you would like to donate to, this is a great solution. The donor-advised fund program has some similarities with a private foundation, but with much lower costs.
There are a number of institutions that will allow you to establish a donor-advised fund. Keep in mind that once you donate to a donor-advised fund program, the gifts are irrevocable and any donation out of the program must be to an eligible charity (typically an IRS-qualified 501(c)(3) public charity). Lastly, if you choose to proceed with a donor-advised fund, it would be best to combine it with a gift of appreciated securities as described above for even more tax savings.
About the Author
Eric Braund is the founder and CFO of Black Walnut Wealth Management, located in Traverse City, Michigan. He holds a bachelor’s degree in finance from Hillsdale College and is a Certified Financial Planner™ and a Chartered Retirement Planning Counselor™. Eric has more than 20 years of experience helping high-net-worth individuals and families protect and grow their wealth for retirement and generations to come. Eric is a native of the Northern Michigan area and is passionate about spending time with his family and maintaining an active lifestyle. Contact Eric at 231.421.7711 or visit www.BlackWalnutWM.com.
All investment advisory services are offered through Dynamic Wealth Advisors.