Charitable Planning Strategies for the Fragile Decade

Incorporating charitable giving strategies (for those who are already charitably inclined) can help optimize your retirement plan while supporting your preferred organizations. This article will provide background on charitable tax deductions and provide an overview of sophisticated giving strategies and how they can benefit donors and beneficiaries.

Before we get into specifics, a caveat: the devil is in the details, not only with the strategy itself but also with how it relates to your own tax and retirement situation. With that in mind, we suggest that before any strategies are implemented, you review them with your advisor or CPA to make sure they fit your situation.

The History of Charitable Deductions

During World War I, the top tax rate went from 15% to 67% in 1917, causing charities to suffer from a lack of funding. Congress passed the War Revenue Act of 1917, which incorporated an income tax deduction based on charitable contributions to address the issue and help charities survive. Since then, there have been variations on the charitable deduction, but the concept has remained a key component of the tax code.

If you itemize deductions on your tax return, a charitable gift today will receive a tax deduction based on the fair market value (FMV) of the gift subject to adjusted gross income (AGI) limitations.  In 2024, you can deduct donations up to 30% of your AGI if the gift is an appreciated security and up to 60% of your AGI if it is a cash gift. If you exceed these limits, you can carry forward your deduction for up to five years. A charitable gift will also remove the asset from your estate, possibly minimizing estate taxes, and capital gains are avoided on the gift. In some cases, a charitable gift can generate a stream of income that a retiree can use to help manage retirement.

Highly Appreciated Securities

The simplest charitable strategy is to gift a highly appreciated security.  Here is how the process works:

 

Ideally, you want to gift low-cost-basis stock to avoid tax on the gain of the sale of the stock.  In the example below, there is a $2,400 tax savings when donating $10,000 stock with a cost basis of $2,000 versus writing a check for $10,000.  Here is an overview of the tax savings of gifting low-cost-basis stock versus giving cash:

 

	Sell stock and donate $10,000 cash	Donate $10,000 of stock directly
Ordinary income tax savings (Assumes 35% tax rate)	$3,500	$3,500
Capital gains tax savings (Assumes 15% tax rate on $8,000 gain)	($1,200)	$1,200
Total tax savings	$2,300	$4,700
Net cost of charitable gift (Fair Market Value – Tax savings)	$7,700	$5,300

 

An additional benefit of this strategy is that it helps diversify your existing portfolio by lessening concentrated positions.

The Bunch and Skip Strategy

The Tax Cut and Jobs Act of 2017 (TCJA) changed the charitable landscape since it increased the standard deduction, making it so that about 90% of tax filers will no longer itemize. In 2024, the standard deduction is $14,600 for an individual filer and $29,200 for a married couple. And, importantly, you must itemize to receive a financial benefit from a charitable gift, except for the Qualified Charitable Distribution (QCD) which we discuss later.

To help taxpayers itemize deductions, a “bunch and skip” gifting strategy can be used. The idea behind this strategy is to make sure you exceed the standard deduction threshold so that you receive a tax deduction for your gift. To do this, you would bunch your planned gifts into one year and skip gifting in subsequent years.  For example, if you plan to gift $10,000 a year for five years ($50,000 total), you may be in a situation where you do not exceed the standard deduction in each of these five years. However, if you front-load your five-year contribution into one year and make a $50,000 gift, then you will be able to deduct the $50,000 against your income in the current year.

Donor-Advised Funds

The “bunch and skip” gifting strategy has increased the popularity of Donor-Advised Funds (DAF). A DAF is a charitable investment account sponsored by a qualified non-profit organization for the sole purpose of supporting qualified charitable organizations. It allows you to front-load your gift and receive a charitable deduction in the year the gift is made. The funds are then invested for tax-free growth, potentially increasing your charitable impact. Charitable grants are made from the account to eligible organizations you select. There are many Donor-Advised Funds available in the marketplace from brokerage firms like Fidelity, Schwab, and Vanguard. Community foundations also have Donor-Advised Funds available.

Qualified Charitable Distributions (QCD)

A Qualified Charitable Distribution (QCD) allows an IRA owner aged 70.5 or older to transfer up to $105,000 (2024 limit) to one or more qualified charities tax-free each year. Also known as IRA charitable distributions or IRA charitable rollovers, QCDs count towards an IRA owner's Required Minimum Distributions (RMDs), making them a valuable way to minimize income tax on those distributions.

To be clear, you do not receive a tax deduction with this strategy.  The main benefits of the QCD are that you don’t have to worry about itemizing your deductions to obtain a financial benefit from the gift, and the income from your RMD does not increase your AGI, potentially negatively impacting other parts of your return or eligibility for income-based programs.

Charitable Remainder Trusts (CRTs)

In a charitable remainder trust (CRT), a beneficiary receives distributions from the trust and whatever remains in the trust when it terminates goes to charity. Contributions to the trust are irrevocable. The structure of these trusts can vary based on your goals; however, the primary types are:

• Charitable Remainder Annuity Trust (CRAT): The beneficiary payments are fixed amounts. Additional contributions to the trust are not allowed.
• Charitable Remainder Unitrust (CRUT): The beneficiary payments are a fixed percentage of the trust's balance. The distributions vary each year based on the trust’s market value. Additional contributions can be made to the trust.
• Net Income with Makeup Charitable Remainder Unitrusts (NIMCRUTs): The beneficiary can receive lower income payments during the first years of the CRT and then move the payout to a higher amount in future years. If the trust produces more income than it is supposed to pay out, the excess will go back into the trust’s principal. If the trust produces less income than it is supposed to pay out, the beneficiaries may receive less money in that year but will have it “made up” to them from an excess year.

The trust can last for the lifetime of the beneficiary or can terminate at a pre-determined date or upon the occurrence of a predefined event. A Charitable Remainder Trust (CRT) offers the following benefits to a retiree:

• A CRT helps “pensionize” an asset by establishing an income stream (around 5% of the value of the asset).
• A CRT provides a charitable tax deduction. While the deduction is not 100% of the market value of the gift, it can be significant. Current interest rates and the structure of the CRT determine the exact amount.
• A CRT helps diversify a portfolio because you can donate a concentrated position.
• A CRT avoids capital gain tax embedded in the donated security.
• A CRT removes the remainder value from your estate.

The reason you obtain these benefits is that you “split” the asset into two parts: the living value and the remainder value.  This is illustrated below:

Which structure best suits your needs will depend on your specific situation. There are additional nuances to CRTs beyond the scope of this article, but to simplify, a CRT should be considered when you need income either for yourself or your beneficiaries, have a concentrated position with a significant gain, need to minimize estate taxes, would like to receive a tax deduction, and have charitable intent.

Charitable Gift Annuities (CGA)

If you don’t exactly meet the criteria for a CRT or are looking to donate a smaller amount (typically less than $250,000), then a Charitable Gift Annuity (CGA) is another strategy to consider. A CGA is a contract between a donor and a charity.  You donate to the charity, and the charity will pay you income for life based on your age. A CGA is similar in concept to a commercial annuity, but the charity guarantees the payments and not the insurer. In most cases, the CGA will offer a lower rate of return on the income stream because of the tax deduction. The income is not adjusted for inflation and will be comprised of a return of principal and income (which will be taxed as ordinary income, depending on what is gifted). A key factor to consider is the financial strength of the charity and their ability to their financial obligations.

Conclusion

Careful consideration and planning should be done to determine which charitable giving strategy is best for your plan. We hope this overview gives you a starting point to consider how planned giving might complement your retirement and philanthropic goals.