By Mike Vredenburgh CFP®, AIF®, ChFC® – Senior Advisor
This is the second and final part of my blog series (Part One HERE) focusing on charitable giving. Specifically, completing charitable gifts using tax-efficient strategies such as Donor-Advised Funds, Qualified Charitable Distributions, or outright gifts of low-basis securities.
A donor-advised fund (DAF) is a private fund administered by a third party and created or the purpose of managing charitable donations on behalf of an organization, family, or individual. They are registered. DAFs can be opened with a custodian like Fidelity or Charles Schwab and can accept cash contributions or appreciated securities. The donor, or account owner, realizes a tax deduction up to 60% of adjusted gross income (AGI) for cash contributions and 30% of AGI for gifts of appreciated securities at the time of the donation. This is advantageous for the donor, especially when gifting appreciated securities, because they avoid paying capital gains tax and receive immediate fair market value tax deductions. Once the cash are securities are in the DAF, there are no restrictions on how long the funds can stay in the account. The donor can then process grants out of the DAF to any qualified charitable organization as long as they receive no benefit from their grant. Since the donor has already received the tax deduction at the time of the gift, they would not receive a second tax deduction once a grant is made from the DAF. DAFs also have annual fees and minimum donation requirements associated with them, so these accounts are not for everyone. However, this strategy can be advantageous to a donor in an especially high-income year. Multiple years of planned charitable donations can be lumped into a high-income year to minimize income taxes.
Individuals 70.5 and older can process Qualified Charitable Distributions (QCDs) from their tax-deferred IRAs. QCDs involve directing charitable gifts from a Pre-Tax IRA directly to a charity without the donor ever having to receive this distribution as ordinary income. Once individuals turn 73, they are required to process Required Minimum Distributions from their tax-deferred IRAs. These distributions are taxable as ordinary income. If the individual is not dependent on these distributions to meet their annual expenses, QCDs can be a tax-efficient way to meet their planned charitable gifting. The IRS caps the amount an individual can donate each year as a QCD directly from your IRA at $100,000. Anything more than this amount must be taken as an Itemized Deduction.
Finally, gifting low-basis securities directly to charities could serve as a viable strategy for those not old enough to utilize QCDs or those not wanting to add a layer of complexity by opening a DAF. Similar to DAFs, the donor would gift low-basis stock to a qualified charitable organization and receive an itemized deduction of its fair market value at the time of the gift, assuming the donor has enough deductions to itemize versus taking the standard deduction. The appreciated security must have been held for at least a year prior to donation. Generally, donors are capped at 30% of Adjusted Gross Income (AGI) when gifting noncash contributions, though certain organizations, such as churches, educational organizations, hospitals, private operating foundations, etc. may qualify for up to 50% of AGI.
Please reach out to me at mvredenburgh@monetagroup.com if you have questions about any of these strategies. I would be happy to discuss further.
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