Despite the relentless headlines that dominate the news cycle reminding us all how hopelessly divided we are as a nation, at our very core, we are by and large a country of strong values and extreme generosity.
Everywhere I look, I see volunteers giving their time, commitment, effort and money to make the communities around us a better place for all. Around our communities, there are wonderful organizations and charities committed to making the world a better place and helping where it is most needed, and citizens willing to make a difference. As we enter the busiest giving season of the year, it's an excellent time to examine ways to maximize the benefits of giving.
In working with many philanthropic clients, we incorporate charitable giving into their wealth management plan. Our formula for wealth management integrates wealth enhancement, wealth protection, wealth transfer, and finally charitable giving.
Focusing on the last piece, there are ways to think about giving which result in a true win-win scenario for the donor and recipient. There are three ways you might be able to give to your favorite qualified charity that also could potentially be a big tax savings to you.
First, if you're 70.5 years old or older, you might consider using your Required Minimum Distribution (RMD) from your IRA. In 2006, Congress passed legislation that made it allowable to donate all or even a portion of your RMD to a qualified charity and avoid paying income tax altogether on the gift. This is known as a Qualified Charitable Donation (QCD). This provision has been extended and has become a permanent fixture in our tax code. To use this strategy, the donation must be made directly from your IRA to your qualified charity. You may make the donation anytime during the calendar year to help satisfy your RMD. The amount of your QCD cannot exceed $100,000, and there is no minimum.
Second, you may set up a Donor Advised Fund (DAF). In a DAF, you permanently relinquish assets for the purpose of charitable giving. For example, you may give away a stock with a very low-cost basis relative to its current value. This strategy potentially gives the donor a double tax benefit, as you can avoid paying capital gains when the stock is sold, and you get the full income tax deduction in the amount of the proceeds from the sale (depending on your Adjusted Gross Income). You may then invest the assets in a diversified portfolio and can donate as much or as little of the proceeds from the DAF anytime to a qualified charity. Once the money is in the DAF, it is separate from your estate. That said, it is an effective way to have flexibility to give anytime, anonymity if so desired, and to have successors give per your wishes in perpetuity.
Finally, a Charitable Remainder Trust (CRT) could be a great option. You essentially donate shares of an appreciated asset or assets to the trust you create. For business owners selling their business, this can be a terrific option (as well as the aforementioned DAF). Donate all or a portion of the shares of your business to the CRT, and upon selling the company, the CRT now has the cash in exchange for the shares. Similar to a DAF, you save on the capital gains taxes and get a deduction for the amount of the sale, and it is separate from your estate. Unlike a DAF, however, you are able to draw money from the CRT yourself each taxable year to supplement your living expenses for the rest of your life. You may do this either in a set dollar amount or a percentage of assets (typically 5 to 10 percent per year). The money grows in the investment portfolio of your choosing, and the qualified charity or charities you name are the beneficiary of the account upon your passing.
These options aren't terribly complicated with help from the right professional and can make a big difference tax-wise for you while at the same time making a big difference to your charities!
Craig Rogers is president of Rogers Wealth Management, an occasional contributor to Fort Worth Inc.