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Making the Most of Charitable Giving Before and After Retirement

How to best give to charity in a tax-smart way could depend on your age. Donor-advised funds and QCDs are two different methods to consider that can still deliver tax savings, even with today's higher standard deductions.

Charitable giving provides families with an opportunity to build a legacy and meaningfully impact the causes most important to them, but effective charitable giving requires a smart strategy. When and how you give makes all the difference.

Effective tax planning can ensure a larger portion of your donation goes toward moving the needle on the philanthropic priorities that matter most to you and your family. The right approach can be a win-win for both donors and causes.

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With these shifts in mind, here’s a fresh look at the most effective ways to give before and after retirement, as well as the role a trusted adviser can play in helping you realize your charitable giving goals and execute a smart tax and estate planning strategy.

A Higher Standard Deduction Shifts Charitable Giving Tax Strategies

Of the many sweeping changes included in the TCJA, the increase in the standard deduction to $24,400 for couples stands to have the biggest impact on charitable giving and tax planning. What’s more, the tax law caps state and local tax deductions at $10,000 and eliminates other itemized deductions.

The cumulative effect of these changes is that many more families will take the standard deduction. In fact, the Urban-Brookings Tax Policy Center estimates the TCJA will cut the number of high-income households taking a deduction for charitable gifts by more than half. That means fewer families will qualify for tax benefits from cash donations. Fortunately, there are other charitable giving strategies that preserve the tax benefits. These strategies depend on your age and whether or not you’re required to take distributions from an Individual Retirement Account (IRA) or employer sponsored 401(k).

Strategies for Donors Younger Than 70½

Appreciated securities remain a powerful philanthropic tool for donors. By gifting stocks held for more than a year that have appreciated in value directly to a charitable organization, donors can exclude the capital gain income they would be required to pay if they sold the stock themselves. They can also deduct the fair market value of the stock if they are itemizing deductions and not taking the standard deduction. These two advantages make appreciated securities a superior option to donating cash.

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Another option for donors is to donate the appreciated securities directly to a donor-advised fund (DAF). With a DAF, donors gift assets to the fund and receive the tax benefit at that time. The assets will continue to grow while they’re in the fund, giving donors the ability and flexibility to grant charitable organizations monetary donations over a period of time. Assets eligible to be donated to a DAF most commonly include appreciated securities or cash, although cash is not recommended for tax purposes. However, certain DAF administrators also accept complex or non-publicly traded assets, including closely held stock (Limited Liability interests, private C- or S-Corp stock), land, life insurance, real estate, hedge fund interests and even artwork.

Here’s a scenario illustrating how a DAF can benefit a donor. Let’s say you plan to donate $10,000 a year over the next five years but have the $50,000 right now. You can place it in a DAF in year one and receive the tax benefit beyond the standard deduction that year. You can then grant $10,000 from the DAF over the next five years. What’s more, the assets will continue to grow in value with the market while they’re in the DAF.

Strategies for Donors 70½ and Older

Once individuals reach age 70½, they must take required minimum distributions (RMDs) from their IRAs and 401(k)s, assuming they’re no longer working. With the new standard deduction, a good strategy is often to gift all or a portion of the RMD directly to a charitable organization as a qualified charitable distribution (QCD). A QCD cannot exceed $100,000.

At first glance, a QCD might seem like the less beneficial option since there is no fair market value charitable deduction. But for donors taking the standard deduction, reducing the taxable income created by the RMD is most often the more tax-efficient strategy.

The Right Partner Can Empower a Better Charitable Giving Approach

Ultimately, the best charitable giving strategy is one that achieves your philanthropic and financial goals in the most effective way possible. That starts with a thorough and meaningful conversation with a trusted adviser who can help you think beyond annual giving to develop a long-term strategy and enduring legacy.

Donating appreciating securities, establishing DAFs and structuring legacy trusts are complex financial undertakings that require an expert touch. The right partner can facilitate these tools while maintaining that focus on maximizing charitable impact with smart tax and estate planning. A comprehensive approach to charitable giving focuses on your goals anchored by a meaningful relationship with a trusted adviser that ultimately delivers greater impact and greater peace of mind.

See Also: So, You Want to Start a Foundation? Great!

About the Author

Grant Rawdin, J.D., CFP®

Founder and CEO, Wescott Financial Advisory Group LLC

Grant Rawdin is Founder and CEO of Wescott Financial Advisory Group LLC. He founded the firm in 1987, which grew from the tax, business and estate services he provided to clients at Duane Morris LLP, a venerable AMLaw 100 law firm. Grant is an attorney, an accountant and a Certified Financial Planner™ and has served as adviser to many businesses, providing strategic, ongoing, and M&A advice. Grant and Wescott are recognized as leading the investment and financial planning industry in innovation, growth and size.

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