The tax code provides high-net-worth charitable donors with strategic opportunities to make their philanthropic activities go further. Opportunities also exist that can minimize their income and estate and gift tax liabilities, increase the value of assets transferred to heirs, achieve enhanced investment returns and diversification opportunities, and more.
Thankfully, advisers have several valuable planning solutions at their disposal. Advisers first need to understand an investor's charitable objectives, investment portfolio, cash flow and capital needs, estate plan goals, and the views of tax advisers and estate plan counsel.
(More: How to discuss philanthropy with wealthy clients.)
Generally, an investor's contribution of cash and appreciated property to charitable organizations may be deducted up to 50% of the individual's adjusted gross income (AGI). Contributions to certain private foundations are limited to 30 percent of AGI.
APPRECIATED SECURITIES
An investor can contribute to a qualifying charity appreciated stocks, bonds or other securities they have held for more than one year and deduct their full fair market value as a charitable deduction against taxable income and avoid paying tax on the investment's related capital gain.
For securities that have depreciated, consider selling the investments first, recognize the capital loss and contribute the sales proceeds to charity, then claim the related cash as a charitable contribution deduction.
DONOR-ADVISED FUNDS
The investor could place cash or securities at any time in either a brokerage account or other designated account created by the intended charitable organization. Upon the investor's deposit into the DAF, the investor no longer owns the related financial assets.
A charitable contribution inures to the investor, with no capital gain or loss recognition to the investor or DAF. The investor does not retain control over how the assets are invested or how the charity disburses or invests the funds. The investor can designate the recipient of the assets contributed to the DAF.
ROTH CONVERSIONS
While investors can avoid an early IRA withdrawal penalty via a timely conversion, taxes would be due on the entire converted amount. However, charitable contributions made in the same year as the conversion can be used to offset the tax liability created by the conversion and no tax would be due.
QUALIFIED DISTRIBUTIONS
Funds are transferred from an investor's IRA account to a nonprofit. While not considered a charitable donation for income tax purposes, the amount transferred is not included in the taxable income of the investor or IRA owner, thus lowering his or her tax liability. This strategy offers certain Medicare and Social Security advantages. You must be age over age 70 ½, and the maximum donation amount is $100,000 to an IRS-approved charity.
Read more:
How to get the most out of qualified distributions
TRUSTS AND ANNUITIES
The investor donates assets to a trust overseen by an IRS-approved charity. The donor (beneficiary) then receives periodic payments from the trust for a predetermined period. Once the distribution period concludes (or the earlier of the donor's death) remaining trust assets revert to the charity.
The donor can avoid a capital gain tax upon his or her contribution of assets to the trust, and assets are sold by the trust; defer tax on trust distributions to the investor over the payout period, as matched to the year of the trust's distribution; and the trust assets are not included in the investor's estate, so no estate tax is incurred.
PRIVATE FOUNDATIONS
Investors can transfer appreciated assets to private foundations they establish, support charitable causes and decrease built-in tax liabilities on appreciated assets transferred to the private foundation. The investor's foundation then conveys grants and donations to 501(c)(3)-approved nonprofits. Appreciation of foundation assets are income tax free, foundations may receive capital gains tax breaks for the receipt of appreciated securities and foundation assets are exempt from estate taxes.
COMPLEX / ILLIQUID ASSETS
With the help of a valuation expert, an investor can earn a fair market value tax deduction in the year of the donation of, say, a valuable painting and avoid a capital gain tax.
(More: Tax reform threatens a powerful client relationship tool.)
While the aforementioned strategies remain viable, for now, tax reform proposals making their way through Congress may disincentivize charitable giving and adversely affect investors' tax positions. Therefore, it is critical to engage your clients now to implement or adjust charitable-giving tax strategies.
Timothy Speiss is Vice President of EisnerAmper Wealth Planning LLC.
