Why Your Charitable Giving Shouldn’t Wait Until Year End

Charitable Giving Throughout the Year

Key Takeaways

  • Giving strategies including Donor Advised Funds, Charitable Trusts, and Qualified Charitable Distributions deliver tax advantages.
  • Contributing fully appreciated assets for charitable giving can help avoid capital gains tax.
  • Cash gifts may be the best option in many cases.

According to the Philanthropy Roundtable, 67% of Americans donate to charity, with a significant portion of giving happening during the month of December as charitable thoughts and sentiments surface during the holiday season. Yet there are major benefits to giving throughout the year, many of which can create greater impact for the non-profit and help you save on taxes associated with your established or growing wealth. In this article, we’ll review four key topics that Alpine Private Wealth explores with our clients to build their charitable giving strategies.

Tax Advantaged Charitable Giving Strategies

Wealth preservation is a core focus for our clients. We build portfolios and wealth management plans with this consideration in mind. We also know that many of our clients are interested in philanthropy, which in its simplest form, can create an income tax deduction for taxpayers who itemize deductions. Here are several ways we can deliver tax advantages through charitable gifting:

  • Donor Advised Funds (DAFs) are charitable giving accounts you can establish for the purposes of investing your assets for giving. You may transfer (or donate) appreciated assets, typically marketable securities, into the DAF, receive an immediate tax deduction, and allow the assets to grow tax-free. Additionally, by contributing the appreciated assets to the DAF, you avoid realizing any taxable capital gains in the appreciated assets.  Subsequently, your donations from the DAF may support the qualified charity or institution of your choice, and the remaining funds continue to grow tax-free until your donations exhaust the DAF. The DAF may be replenished with additional contributions at any time.
  • Charitable Trusts are split interest vehicles that are infrequently utilized by investors but are very popular with many foundations, endowments and other non-profit entities. Split interest simply means that the income from the vehicle goes to one party and the remainder of the vehicle goes to another party.  The two most common types are Charitable Lead Trusts and Charitable Remainder Trusts. These charitable trusts can pay a fixed dollar amount per year (known as annuity trusts) or can pay a fixed percentage of the principle per year (known as unitrusts). The difference between Remainder and Lead defines the split interest nature of the trust.  Remainder trusts pay a beneficiary, named by the donor, an income for the life of the donor, with the remaining balance going to the charity upon the death of the beneficiary. The donor can and often does name himself or herself as the beneficiary. Lead trusts, on the other hand, pay an income to the charity and upon the death of the donor, the remainder of the trust goes to a named beneficiary.
  • Qualified Charitable Distributions (QCDs) offer an alternative to taking Required Minimum Distributions (RMD) from retirement accounts each year for those who have reached the age at which RMDs begin. Taking advantage of this allows you to direct up to $105,000 of your RMD to a charity or charities rather than receiving the income associated with your RMD thus, avoiding the income taxes associated with the RMD. Unlike other cash donations, QCDs do not require itemizing your deductions to receive the full tax benefit.

As you work with your wealth advisor throughout the year, it’s important to have transparent, holistic conversations which involve all aspects of your wealth management, including your wealth accumulation, protection strategies, and giving plans.

Donating Appreciated Assets

As we monitor wealth plans for our clients throughout the year, we take note of the appreciation of various assets in our clients’ portfolios. In many cases it can be quite advantageous for clients to use the vehicles noted above to liquidate fully appreciated assets within a charitable structure thereby avoiding capital gains taxes on the appreciation of the client’s assets. The proceeds can then be donated to charity. While waiting until December is typical, contributions to the vehicles mentioned can be made at any time. In some instances, it can be beneficial to donate appreciated securities earlier in the year, before they are sold by the investment manager selected by the Advisor to manage the portfolio. Additionally, many non-profits appreciate gifts earlier in the year, especially if their fiscal year ends mid-year as opposed to at the end of the calendar year or if they have a specific capital project that needs to be funded intra-year.

Cash Giving for Immediate Impact

Regardless of your level of charitable giving, the act and passion behind it is very personal for every individual and family. You may find yourself at a gala where you are moved to support a specific cause in the moment. Alternatively, you and your Advisor may determine that cash giving is the best route for your goals and situation, especially in a year where you anticipate modest income or will not itemize your deductions. Giving cash allows you flexibility that some of the more sophisticated strategies we’ve outlined above may not provide, and for most investors, there are still tax benefits to doing so.

Giving to Charity Can be a Family Affair

For clients with generational wealth, we see many parents who begin to share the practice of philanthropy with their children at an early age. Some perform acts of volunteerism together, while others choose charitable causes together and even allocate funds to their children for the purposes of donation. This can be an excellent way to continue a family’s legacy and make philanthropy a practice that happens not only all year long, but for children, lifelong.

At Alpine Private Wealth, we are keenly aware that every situation – and every wealth plan – is unique. That’s why we work with clients throughout the year to not only grow their wealth in a steady, deliberate manner but also to protect the wealth they’ve worked hard to build and to preserve through the generations. Philanthropy is often part of our conversations as we focus on making an impact in the community in the most tax-advantageous manner for our client’s overall portfolio.

We look forward to sharing more about the strategies we’ve described above. Please feel free to contact us with any questions, or to learn if any of these may be a fit for your financial situation.