ODCMs Thoughts on Charitable Giving

Jared Troutman |

ODCMs Thoughts on Charitable Giving

Written by Jim Childress of Old Dominion Capital Management, Inc.

February 20, 2018

In contemplating making a significant charitable gift, there are many things to consider.  Each individual has a unique situation and often a number of objectives that must be balanced against each other.  While donors may wish to support causes that are important to them, they must also be confident that they are not compromising their own financial security, that they are meeting their objectives for their heirs, and that they are maximizing the tax benefits of their gift.  While not intended to be comprehensive, this document addresses some of the considerations.

Making a gift now

By giving cash or securities to a charity, the funds are immediately available to address the charity’s mission.  With certain IRS limitations, the donor gets a current tax deduction for the gift.  Donors can also have Require Minimum Distributions from IRAs sent directly to a charity, so that this part of the distribution never becomes taxable income to the donor.  By giving appreciated securities to a charity, the donor can not only deduct the value of the securities at the time of the gift, but can also avoid the eventual capital gain taxes that would have resulted from the sale of the securities.

Arranging for a future gift

Careful planning for a future charitable gift can allow greater flexibility to meet the donor’s lifetime needs as well as satisfying the donor’s charitable intent.  This flexibility makes it more practical to pass a larger proportion of the donor’s assets to charity and leave a legacy with much more impact.  Although the charity may have to wait for years to receive some or all of the money, a donor may appreciate the opportunity to leave a more substantial legacy.

There are many different tools to maximize the tax benefits of a donation and to balance a donor’s lifetime needs with their desire to leave a significant charitable gift.  Many of these tools are complicated and some are irrevocable, so it is extremely important for a potential donor to consider all aspects of their financial situation.  Expert professional advice is critical.  Investment advisor, accountant, and attorney may all need to play a role in such a decision.  Mention here of any particular strategy is meant only to illustrate some of the possibilities and should not be taken as a recommendation.

Make a charity the beneficiary of an IRA or retirement plan.  These tax deferred accounts pass to a family beneficiary with an embedded tax liability.  A tax-exempt charity can make use of all of the funds without having to pay income tax.  Because the owner of the tax deferred account would be subject to Required Minimum Distributions after a certain age, there is no way to know what the eventual value of such a gift would be.  If the owner lives a very long time, there may be little money left in the tax deferred account.

Charitable Remainder Trusts are often funded with low cost-basis securities and allow the donor to take a specified amount or percentage of the account value each year as income during their lifetime, with the remainder passing directly to a charity, or charities, at their death.  This is a split-interest trust and depending on the donor’s age and the income level that they choose to receive, the IRS determines a percentage of the initial value of the trust that will be considered a charitable gift, and the donor is permitted to take a current income tax deduction for that amount.

Charitable Lead Trusts are another type of split-interest trust, which specify a dollar amount or a percentage of the account value that will go to a charity for some number of years, with the remainder going to non-charitable beneficiaries on a predetermined future date.  Again, the IRS determines a percentage of the initial value of the trust that will be considered a charitable gift, and the donor is permitted to take a current income tax deduction for that amount.  This type of trust is sometimes used to reduce the size of a taxable estate, while still passing significant amounts to heirs. It also allows the donor to reduce or eliminate the generation skipping tax while passing assets to their grandchildren or other descendents.  

Donor Advised Funds are a way to qualify for a tax deduction for a charitable gift when the gift is placed in the fund, and then make a series of gifts over time from the fund to one or more charities.  This is often used as a simplified alternative to a costlier private foundation.  It is a good solution for legacy giving as it can continue beyond the lifetime of the donor with successor advisors named to the fund. This strategy allows the donor flexibility about the timing of future gifts as well as the recipients of those gifts, but captures the tax deduction up front.  This strategy can also be used to concentrate many years’ worth of charitable gift deductions into a single tax year, which could have some advantages. 

Private Foundations are tax exempt charitable organizations which can receive contributions.  A private foundation can be used to create a long-lived charitable entity operated by a board of directors under the rules of non-profit corporations.  A family can get tax benefits from contributions to the foundation and have a flexible, multi-generational vehicle for achieving charitable goals.  The costs of operation and compliance make this feasible only for large legacy gifts. 

Great satisfaction can come from directing a significant portion of one’s accumulated wealth to a meaningful cause.  This can often be done in such a way that other personal and family needs can also be met, and then the satisfaction is complete.