Occasionally, Black Walnut Wealth Management provides content to the Traverse City Business News and other media outlets. This article ran in the December 2021 issue of the Traverse City Business News, and can be read in its entirety below.
Many people want to give to charity, but they often don’t know how to go about doing it. First, there are so many different organizations and worthy causes that it can feel overwhelming to choose. Then you have to think about: What is the best way to donate? How do I know if I’m making the most of my decision to give?
Let’s start here instead: What impact do you want to make? That’s the real question—and one you may need to do some soul searching to figure out. But once you find the answer, your philanthropic goals will be much easier to implement.
If charitable giving is important to you, your philanthropy should start with a plan. Sure, you can donate a large sum of cash and be done with it, but there are more effective ways to give. Here are five tax-favored strategies to ensure you don’t leave money and tax advantages on the table while making the type of impact you want to have.
1. Bunched Charitable Giving
Bunched charitable giving is exactly what it sounds like. Rather than donating small amounts each year, this strategy calls for “bunching” multiple years’ worth of contributions into a single donation in order to take advantage of the charitable tax deduction. It’s a pretty straightforward option, but it’s not the most efficient strategy if you’re looking to make recurring annual donations.
2. Donor-Advised Funds
A donor-advised fund (DAF), on the other hand, allows you to donate annually, while still bunching your contributions for a tax deduction. With a DAF, you contribute a sum of money up front, then distribute those funds to various nonprofits on your own schedule. In the meantime, your money is invested and grows tax-free.
This option is great if you are set on donating but haven’t decided on where or to whom to give. A DAF also allows you to contribute securities and assets other than cash, making it an effective strategy that could potentially save you big come tax season.
3. Qualified Charitable Distributions
A qualified charitable distribution (QCD) is an efficient way to donate large sums with little to no tax liability. What’s better than that?
QCDs involve redirecting the required minimum distribution (RMD) from a qualified retirement account to a charity instead. Since QCDs are not considered taxable income, they’re an appealing option for those who don’t need the retirement distribution and don’t want to be on the hook for the taxes.
Each taxpayer can donate up to $100,000 annually through a QCD, meaning a couple can donate a combined total of $200,000 each year. This is a highly effective charitable strategy because it allows you to give to your most important causes, while also reducing your current year tax liability and your overall taxable estate.
4. Charitable Remainder Trusts
A charitable remainder trust (CRT) is an irrevocable trust that provides income for you and your beneficiaries for a specific period of time. Once the time frame expires, the remaining trust amount is donated to a charity of your choosing. Depending on which type of CRT you choose, a partial charitable deduction may be available.
Like QCDs, CRTs also reduce your taxable estate. That works out great for your estate taxes, but it also reduces your control over the assets in the meantime. Be sure you don’t add anything to the trust that you might want to sell or gift to someone else down the road.
5. Review Your Estate Plan
Lastly, it should go without saying, but make sure to review your estate plan before deciding on a charitable gifting strategy. Many of the tax-favored options mentioned above can and should be incorporated into an estate plan, as they will ultimately impact the size of your taxable estate.
Remember, you don’t want to leave money and tax advantages on the table if you don’t have to. It’s important to donate to the causes nearest to your heart, but it’s just as important to ensure your donations make sense for your overall financial plan.
So, what impact do you want to make? Regardless of which option or options you choose, your philanthropy needs a plan. Consider reaching out to an experienced CERTIFIED FINANCIAL PLANNER™ professional (CFP®) who is a fiduciary, so he or she can help you make the most of your charitable giving.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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