Since the 2017 Tax Cuts and Jobs Act, now more than ever there is a greater incentive for donors to contemplate whether charitable planning will provide an immediate or future benefit. Donors who will benefit from this range from business owners, executives, doctors, accountants, attorneys, professional athletes and even retirees due to the new deduction limits on state and local taxes (SALT), the elimination of several other deductions, as well as the increased standard deduction.
Here are five charitable planning options that can save you money on taxes in 2019 and beyond:
1. Donor-Advised Fund (DAF)
A donor-advised fund is a separately managed charitable investment account that is operated by a section 501(c)(3) organization, also known as a sponsor or sponsoring organization. You can contribute cash, appreciated securities, real estate and other property to receive an immediate tax deduction. Those assets grow tax-free, and in turn you can make recommendations to any charity, although the sponsoring organization makes the final decision (learn more by reading Choosing Between a Private Foundation vs. Donor-Advised Fund).
The main advantage of a donor-advised fund is an upfront tax deduction. The disadvantages are loss of control with contributions, investment fees charged, and the sponsoring organization having the final choice on the charity that receives the funds.
2. Charitable Lead Trust (CLT)
A charitable lead trust is a type of irrevocable trust that provides income payments to a charity for a period of time — typically through a fixed term of years — with the remainder either going to the donor or donor’s family members. Gifts can be cash, appreciated securities, real estate and other types of property. Depending on the type of charitable lead trust — grantor or non-grantor — the purpose for establishing either can be for estate or gift tax reduction, as well as an income tax deduction.
A grantor charitable lead trust makes payments to a charity for a fixed period of years, with the remainder going back to the donor (also known as the “grantor”). With this structure, the donor, or grantor, would receive an upfront income tax deduction for the present value of the charitable donation. However, the donor would not receive any additional tax deductions for future distributions made to a charity or charities through the rest of the term.
A non-grantor charitable lead trust makes payments to a charity for a fixed period of years, with the remainder going to family members or other persons who are not the donor. With this structure, the donor can substantially — or potentially entirely — avoid paying estate or gift taxes.
The advantages to the donor are either an upfront tax deduction or estate or gift tax reduction. In addition, the charity will also instantly benefit the most from this arrangement because of the immediate payments that will be made. The disadvantage is that once assets are transferred to the trust, they cannot be removed.
3. Charitable Remainder Trust (CRT)
A charitable remainder trust is another type of irrevocable trust, and the complete opposite of a charitable lead trust. Assets are transferred to the charitable remainder trust, which gives an immediate tax deduction, in addition to income for a period of time or the rest of your life. Gifts can be cash, appreciated securities, real estate and other types of property.
The income stream can be paid to you, a spouse, and any leftover will go to a beneficiary if you were to pass away prematurely and didn’t receive the predetermined income payments. At death, the remainder goes to the charity of your choice.
The advantages to the donor are the upfront tax deduction as well as the income payments made. Keep in mind that with this structure a charity will only benefit from this arrangement after you pass away. As with a charitable lead trust, the disadvantage is that once assets are transferred to the trust, they cannot be removed.
4. Charitable Gift Annuity (CGA)
A charitable gift annuity is an irrevocable contract between a donor and a charity that provides an upfront tax deduction as well as a lifetime stream of income payments. Gifts can be cash, appreciated securities, real estate and other types of property (learn more by reading Gift Annuity Offers Tax Break and Retirement Income).
Many nonprofits and large universities offer charitable gift annuities. The advantages to the donor are the upfront tax deduction as well as the income payments. Similar to a charitable remainder trust, the charity (or multiple charities) will only benefit from this arrangement after you pass away. The disadvantages are that once assets are transferred to the trust, they cannot be removed and payments will cease if the charity goes insolvent.
As you can see, the charitable remainder trust and charitable gift annuity are very similar. The differences lie in their structure. Charitable gift annuities — like all annuities — are contracts and pay you (and your spouse if structured correctly) fixed payments for the rest of your lives, not adjusted for inflation. Payments are backed by the charity’s assets and are more regulated than a charitable remainder trust. With a charitable remainder trust, you can choose from either fixed or variable payments with both the tax deduction and payout potentially greater versus the charitable gift annuity. Also, the charitable remainder trust has more flexibility in case you want to contribute appreciated assets.
5. Qualified Charitable Distribution (QCD)
A qualified charitable distribution is for those age 70½ or more who don’t want (or need) the required minimum distribution (RMD) from their IRA. Although a QCD doesn’t provide an upfront tax deduction or lifetime income like a charitable gift annuity or trust would, it’s an overlooked tax loophole because retirees can exclude up to $100,000 per year from their RMDs without having to claim it on their tax return. The QCD is made directly from your IRA to a charity without having to be claimed as income. If you’re married, your spouse can also exclude up to $100,000 per year as well.
The advantage to the donor is the exclusion of up to $100,000 per year from their tax return (each spouse), which can help reduce Social Security taxation as well as Medicare premiums due to the lower adjusted gross income (AGI). The disadvantage is once the RMD is transferred to a charity, it is irrevocable and cannot be undone.
While it’s vital to have this conversation with a well-versed tax or financial professional, donors should explore certain charitable vehicles (or a combination) to maximize their tax deductions now while supporting a favorite charity at the same time. Otherwise, these opportunities may cease or substantially change in the next few years.
Carlos Dias Jr. is a financial adviser, public speaker and president of Dias Wealth LLC, in the Orlando, Florida, area, offering strategic financial planning services to business owners, executives, retirees and professional athletes. Carlos is a nationally syndicated columnist for Kiplinger and has contributed, been featured or quoted in over 100 publications, including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today and several others. He's also been interviewed on various radio and television stations. Carlos is trilingual, fluent in both Portuguese and Spanish.
Amazon To Offer Students $25 Flights For The Holidays — But You Must Act Fast
Amazon Prime Student members will have a chance to score one of 3,000 tickets for a limited time, starting December 5.
By Jamie Feldman Published
Walt Disney's Dividend Is Back. Will DIS Stock Follow?
Disney reinstated its dividend after a three-year suspension as shares remain depressed.
By Dan Burrows Published
Year-End Tax Planning for a Financially Healthier Retirement
Getting your tax ducks in a row for the end of the year can decrease your tax liability and make the most of your income, now and in retirement.
By Ryan Marston, Investment Adviser Representative Published
Where to Start Financially After a Life-Changing Diagnosis
Dealing with an illness, yours or your child’s or that of another loved one, is hard enough without adding financial duress. Here are some considerations and suggestions for covering expenses.
By Stephen B. Dunbar III, JD, CLU Published
Six Ways to Prepare for Widowhood and Protect the Surviving Spouse
No one wants to have to plan for losing their spouse, but having plans in place and knowing what to do when the time comes can alleviate at least some of the stress.
By Tyler Hill, Investment Adviser Representative Published
Creating a Blended Family? Three Key Steps to Consider
Blended families can make your finances and estate extra complicated, but you can head off some of those issues with careful planning.
By Adam Frank Published
Do You Need Disability Insurance?
If you work for a living, the answer is yes, so don’t overlook protecting your biggest asset. Open enrollment season is the perfect time to assess your options.
By Frank J. Legan Published
Retirement Planning in a Time of Inflation and High Interest Rates
Today’s challenges make retirement planning even more complicated than usual, but it’s not all doom and gloom.
By Ken Moraif, MBA, CFP®, CRPC® Published
Not Confident About Retirement Despite Financial Success?
You’re not alone. Uncertainty related to interest rates, government debt, long-term care and market volatility is making everyone uneasy. What can you do about it?
By Barry H. Spencer, Registered Investment Adviser Published
Risk vs Reward: Understanding This Intricate Investing Dance
The stock market can be unpredictable and complex, so having a good grasp on how to mitigate risk is essential.
By Kerim Derhalli Published