Charitable Giving Tools and Your Financial Plan

One of the things I love most about Spokane is our tight knit community that supports one another. Spokane isn’t so large that you feel entirely lost in town, but it’s also not so small that you always run into the same people, in my estimation is a great mid-sized city. As a mid-sized city, one of the things I think we do really well in Spokane is create a flourishing community through our partnerships with non-profit organizations.

I recently read that Spokane has more than 3,000 non-profits in the greater Spokane metro area! Within the 3,000 are churches, foundations, and organizations that support restaurant workers, at risk youth, educational communities and my personal favorite is Feast World Kitchen (a non-profit restaurant that features food made by different refugee families living in Spokane).

Charitable giving is an important tool that when used wisely can help build our community. Charitable giving can also be a strategic tool and component for your financial plan.

In this blog article, I mention a handful of different ways one can give cash or assets to charities that can pair nicely with other financial planning topics.

Gift of Appreciated Assets

-  What it is: Instead of donating cash, donors give assets like stocks or real estate that have appreciated in value.

-  Financial Impact: Why one should gift an asset rather than cash, is typically because of tax implications. Two of the relevant taxes associated with this decision is capital gains tax and itemized deductions which reduce your tax liability. When you buy an asset, like a stock (in my examples I’ll use a made up stock like xyz corp), you pay taxes on the asset when you sell it. Typically, you can avoid that capital gains tax when you gift the asset to the non-profit charity. Also, this gift can help you reduce your income tax liability because you will receive an itemized deduction in the amount of the gift up to 30% of your AGI (adjusted gross income). Cash gifts on the other hand allow for an itemized deduction of up to 60% of your AGI.

- Example: Let’s say you have an AGI of $200,000 in a particular tax year. Let’s also say you bought xyz stock 10 years ago for $10,000 and it is now worth $50,000, a 500% gain in ten years! If you were to sell the stock, you’d have to pay long term capital gains tax of 15% (So $40,000 x 15% = $6,000). Then, when you give the $50,000 to the non-profit, you’d get a reduction of your AGI as an itemized deduction up to 60% of your AGI, so you’d reduce your AGI to $150,000 and would get to reduce your income tax liability by $11,000 (assuming you are married filing jointly $50,000 x 22% tax bracket). If you gift the appreciated stock without selling it first, you can avoid the capital gains tax and the non-profit doesn’t incur the capital gains tax either because it is a non-profit organization. You would also still get the tax liability reduction because the $50,000 is still 30% of your AGI.

 Donor-Advised Funds (DAFs)

-  What it is: A DAF is a philanthropic vehicle wherein a donor contributes to the fund and receives an immediate tax deduction. Over time, the donor can recommend grants from the fund to their chosen charities. It’s sort of like a personal family foundation. You can open a DAF account at many popular custodians like Vanguard and Fidelity.

-  Financial Impact: Contributions to a DAF are immediately tax-deductible, which can reduce a donor's taxable income for that year. Moreover, assets within a DAF can grow tax-free, optimizing the fund's potential charitable impact. These gifts are irrevocable, you can’t get back what you put in.

- Example: Let’s say you plan to give a charity a gift of $50,000 but you prefer to spread it out over a five year time period. If you give an annual gift of $10,000 to the charity, you many not be able to qualify for itemizing your deductions and in that case the charitable gift doesn’t have an impact on your tax liability. The DAF is great because you can make that lump sum gift in one tax year, get the tax deduction and you still control when you make those gifts to the charity. You can choose to spread the gifts out over the next five years. The gift can also be invested in stocks and bonds and have the potential to grow during that time period tax free.

Charitable Remainder Trusts (CRTs)

-  What it is: A donor places assets in this trust, receiving a tax deduction. The trust then provides an income to the donor (or their designated beneficiaries) for a set period. After the term, the remaining assets go to the chosen charity. One strategy that I’ve seen work well is naming your DAF as the beneficiary of your CRT, so after you die your family members can continue to direct your charitable aims as successors of the DAF.

-  Financial Impact: CRTs offer dual benefits. Donors receive an immediate tax deduction upon funding the trust and avoid capital gains tax on the sale of appreciated assets within the trust. This tool is particularly beneficial for those with highly appreciated assets seeking to diversify without incurring a significant tax hit.

- Example: One great use of CRTs is placing highly appreciated and depreciated assets like rental real estate into a CRT. Imagine owning a rental property for 20 years and you’ve depreciated that building over the years, the value of the land and building has also probably gone up in value over time. If you are considering selling that building, you would have to pay quite a bit in capital gains and recapture tax. If you put the building in a CRT, you can avoid the capital gains and recapture tax, invest the proceeds, and withdraw either a dollar amount per year or a percentage of the remaining capital in the account. Whatever is left in the trust after both partners are deceased goes to the charitable beneficiaries of your choosing.

Charitable Lead Trusts (CLTs)

-  What it is: The inverse of a CRT. A CLT provides an income to a charity for a predetermined period. After this term, the remaining assets return to the donor or their heirs.

-  Financial Impact: CLTs can reduce potential estate and gift tax liabilities, making them an attractive tool for high-net-worth individuals aiming to pass on assets to heirs while also supporting charitable causes.

A tip on how to select charitable beneficiaries

For some people selecting a charitable beneficiary is easy, they know exactly where they would like their charitable gift to go to. For others it can be difficult to know where to get started with who they should give their gifts to. Here’s a few tips for selecting beneficiaries:

• Think about your likes, interests, and values and do a google search for local non-profits in your community.

• Websites like https://www.charitynavigator.org/ can be a helpful tool for finding local non-profits and determining how they manage their financial gifts.

• Utilizing local foundations can be a great tool as well, where you make them your beneficiary and they handle vetting worthwhile non-profits through their granting process. Two excellent local Inland Northwest foundations to for your review might be the Innovia Foundation and the Believe in Me Foundation.

Conclusion

Charitable giving, when integrated thoughtfully into financial planning, offers more than just altruistic rewards. It can be a strategic move, providing tax advantages, income streams, and even estate planning benefits. Understanding these tools and their implications helps craft a holistic plan that aligns with your financial and philanthropic goals.