By Jefferson Adcock, Partner
At TrustCore, we consistently see charitable giving as a key priority in our clients’ financial goals. As advisors, we work to maximize the dollars our clients can contribute to their favorite causes. Below you’ll find two key strategies we use to improve the tax efficiency of charitable gifts.
As a quick litmus test, if you have been writing checks to charities, this article may help you increase the impact of your giving.
Donor advised funds (DAF)
The easiest way to make charitable contributions is to give cash, but a more efficient way is to give appreciated assets. Generally in the latter, the donor receives the full value of the gift as a charitable deduction on their tax return and neither the donor nor the recipient owes any tax on capital gains realized. A DAF can be a great tool to efficiently gift appreciated assets to charities over time.
Here’s how it works.
- Set up a DAF account with a donor-advised fund provider. Currently Schwab, Vanguard and Fidelity are leaders.
- Annual account fees typically start at 0.60% of assets and decrease as the balance increases.
- Fund your account by gifting appreciated assets to your DAF, potentially creating an income tax deduction in the year of funding.
- Make charitable gifts, called grants, from the DAF in the same year the account is funded or in future years.
- Invest your DAF account balance in the interim, making it possible for your giving funds to grow.
- Request grants to any IRS qualified charity on a one-time or recurring basis and most DAF plans will process the funds on your behalf.
As an example, a new client recently came to us with large capital gain positions in a taxable brokerage account and a pattern of consistent charitable giving based on previous years’ tax returns. We thought a DAF would allow them to gift appreciated securities. In addition, cash that was earmarked for charitable donations could be rerouted back into the portfolio to replenish the funds given away.
To put numbers to it, let’s say a couple has taxable income of $250,000 and gives away $15,000 annually. They own an ETF purchased six years ago for $20,000 that is now worth $40,000. The couple can gift that position to their DAF and, if eligible to itemize their tax deductions, receive the full $40,000 in charitable deductions this year. This is an itemized tax savings of approximately $7,200. Also, they potentially avoid capital gains taxes of $3,760 on the position if they were to sell it instead. The couple now has at least the next two years of gifting already saved away in their DAF to grant as they see fit.
This strategy is attractive for clients nearing the end of their peak earnings years with a retirement date on the horizon. Assuming they continue to have taxable appreciated assets, it makes sense to pre-fund giving during the remaining high-income years, using the DAF as a holding account. This allows for a higher tax deduction and creates earmarked funds for charitable giving to continue.
Leveraging your IRA
Attaining age 70 is an important milestone in the financial world, as age 70½ begins the clock on the Required Minimum Distribution (RMD) for anyone with IRA assets. The IRS allowed your IRA to grow over time on a tax-deferred basis, but now require that you begin taking a certain amount out annually, taxed as ordinary income. A recent law passed making Qualified Charitable Distributions (QCDs) permanent for people who are subject to RMDs. The QCD is a distribution made from an IRA directly to a charitable organization that satisfies some or all of the participant’s RMD, up to $100,000 maximum per year. Funds withdrawn from an IRA in this manner are not subject to ordinary income tax.
As you can see, there is an advantage to using donor advised funds in high-earning years to avoid capital gain taxes, then switching to IRA Qualified Charitable Distributions once eligible. These two planning tools are a great way to save money, give more, and enjoy the emotional and financial benefits of helping others.
If you have a desire to give efficiently and begin a planning relationship, please contact us.
TrustCore is one of the largest independent wealth management firms in the U.S. From its offices in Brentwood, a suburb of Nashville, TrustCore advises on client assets of $1.8 billion for clients in 34 states across the nation.
Financial planning and investment advisory services offered through TrustCore Financial Services, LLC. Investments offered through TrustCore Investments, LLC, member FINRA and SIPC®. This is not an offer, or solicitation of an offer, to buy or sell any security investment or other product.