Personal legacy planningMaximize your giving with donor-advised funds, qualified charitable distributions and gifts of stock


December 7, 2021

Key things to know

  • Charitable giving strategies that extend beyond traditional gifts of cash can have a greater impact on your preferred charities while potentially delivering important tax advantages for you.

  • Qualified charitable donations (QCDs), gifts of appreciated stock and donor-advised funds (DAFs) offer immediate tax benefits but require advance planning to best support your targeted charities.

If charitable giving is a priority for you, your intention may be that your gift benefits both the charity and your own bottom line. While traditional “checkbook” philanthropy may be the default approach for many, there are potentially more tax-effective ways to proceed. Planning can make a big difference as you assess ways to support your favorite causes.

There are strategies beyond traditional cash gifts that can preserve more value for charitable giving, potentially deliver important tax advantages and have a greater impact on the targeted charities.

A “triple win” through qualified charitable distributions (QCDs)

IRAs with large balances, particularly those subject to required minimum distribution (RMD) rules are a prime source for charitable gifts. A qualified charitable distribution (QCD) from an IRA is a tax-efficient gifting strategy to consider. Each year, individuals age 70 1/2 or older can choose to make a direct gift totaling up to $100,000 from their IRAs to qualified charities. Rather than the owner receiving a distribution from the IRA, the gift moves directly from the IRA account to the charity.

This has three major benefits for donors.

  • It limits the immediate tax hit. If you received a $100,000 distribution from a traditional IRA, most or all of the amount taken would be subject to tax at the highest applicable ordinary income tax rate. That would result in a net distribution (after tax) of $63,000 if you’re in the 37% tax bracket. That does not count the impact of state and local taxes.
  • A QCD can satisfy all or a part of an RMD at age 72. If there’s no need to receive a distribution from the IRA, it becomes a more efficient way to make a charitable donation.
  • It can help reduce the size of your estate. If, for example, you and your spouse have large IRAs, the estate can be reduced by $200,000 without any tax considerations while still benefiting charitable organizations.

Be certain that this transaction is handled appropriately. You cannot first take possession of the funds paid out from the IRA to complete a proper QCD. The money must go directly from the IRA custodian to your designated charity.

Note that this strategy works with traditional and inherited IRAs, but not with SEP or SIMPLE IRAs. These gifts must be made within a calendar year to qualify for the QCD provision. Additionally, only certain charities can accept QCDs. Private foundations, supporting organizations and donor advised funds do not qualify for QCDs.

Gifting appreciated stock

The most common form of non-cash contributions is a gift of publicly traded stock. You may hold stock that has benefited from the generally favorable market conditions of recent years. Highly appreciated securities that would generate a significant capital gain could result in a major tax liability when shares are sold. This includes a top federal capital gains tax rate of 20% plus, in many cases, an additional 3.8% net investment income tax (NIIT).

If you planned to make a $250,000 gift to charity, selling the stock first may require that you liquidate $328,000 of stock. After selling that much stock, and after taxes are accounted for (capital gains and NIIT), your net proceeds would equal approximately $250,000, sufficient to cover the planned gift.

A more effective strategy may be to donate stock valued at $250,000 directly to the charitable organization. This approach also has three major benefits to donors:

  • You avoid tax liability. Plus, you still claim a tax deduction for the gift (within allowable limits) equal to the fair market value of the stock.
  • You retain more in your investment portfolio while still fulfilling your charitable intentions. Note that this strategy can work for other types of assets, ranging from real estate to cryptocurrency.
  • If you own a highly concentrated investment position, you can better diversify your portfolio. You can sell additional shares, which will result in a capital gain. However, the tax-deductible gift of the shares you donated to a qualified charity can offset the gain, limiting or eliminating any tax liability. Proceeds from selling additional shares can then be reallocated into other investments, more effectively diversifying the portfolio.

Note that any transaction must occur before December 31 of the year in which you hope to claim the tax deduction.

Gifting assets with a short holding period

If your portfolio includes assets held for 12 months or less but you’re considering liquidating the positions, donating those assets is an option. If you sell such “short-term” holdings, the applicable tax on any profits are equal to your ordinary income tax rate. That could be as high as 37% under current tax laws. The 3.8% NIIT may also apply, as well as state and local taxes.

There are strategies beyond traditional cash gifts that can preserve more value for charitable giving, deliver important tax advantages and have a greater impact on the targeted charities.

However, unlike donating an asset with a long-term capital gain, one held for 12 months or less has different tax treatment when it’s directed to a qualified charity. You’re only allowed to claim the cost basis of the asset or the current fair market value as a deduction, whichever is less. In other words, if one of your holdings earned significant appreciation in the past few months, you can’t claim the appreciated value as a tax deduction if you donate it. You may be better off waiting until your holding period exceeds one year, at which time you can donate the asset and claim a deduction based on the full market value.

The only advantage to gifting an appreciated short-term asset is that you avoid claiming the short-term capital gain that would result if you liquidated the position.

Exiting a business position

When planning to exit a business, you may want to consider incorporating charitable contributions as part of your exit strategy. Gifting all or part of an ownership position in a business can even be effective prior to an initial public offering (IPO), so the charity can take advantage of the opportunity to cash in the stock once it goes public. At the same time, you avoid capital gains tax by limiting the amount of the ownership position that must be sold. Timing is of the essence when donating privately held stock to a donor advised fund. It’s important to note that gifts of appreciated non-cash assets can involve complicated tax analysis and advanced planning.

If you sell a business or an ownership position in one year and generate a sudden windfall as a result, establishing a charitable foundation or directing significant dollars into a donor-advised fund can help reduce your tax burden. In both instances, you take a write-off (up to allowable limits) of the amount you designate for that purpose.

Targeted donations to qualified charitable groups can be determined later, over the course of years. Yet establishing such an entity helps you deal with the dramatic tax impact of a one-time windfall from selling the business.

Donor advised funds (DAF)

A DAF allows an individual to transfer assets irrevocably to a charitable fund, be eligible for an immediate tax deduction (in most cases, up to the full market value) and then recommend grant distributions to one or more charitable organizations on their own timetable. Assets eligible for transfer include publicly traded securities, restricted stock, real estate, business interests and even cryptocurrency and art.

DAFs are easy to establish, simple to manage and a tax efficient way to initiate a large donation. For example, directing appreciated assets to a donor advised fund allows money to be invested and grow tax-free over time, but the donor avoids capital gains taxes. DAFs are an increasingly popular tool for those new to philanthropy, as they require no account administration on the part of the donor. The sponsoring organization oversees charity due diligence, grant processing, recordkeeping and tax filing.

DAFs are also excellent charitable strategies to involve the donor’s family in philanthropy, either immediately or down the road as part of a legacy plan.

Strategic giving makes sense

These are a few strategies that can take you beyond “checkbook philanthropy,” but there are others worth exploring. It’s important to incorporate your giving strategy into your overall wealth plan. If you intend to make gifts in order to claim a tax write-off in the current year, be sure to plan well in advance so there’s adequate time to complete the transaction.

Consult with your financial, tax and legal advisors to consider all of the options available to you. Take the time to explore ways that you can leverage your wealth more effectively for your favored charities while also doing so in the most tax-efficient way.

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