The ongoing global pandemic and recent September 11 anniversary provide us with a great opportunity to re-evaluate our goals. At the outset of the pandemic, we were forced to make drastic changes to our everyday lives. Even now, countless health care workers continue to endure long hours in overrun hospitals with insufficient supplies struggling to save lives in the face of growing admissions. Across the country and around the planet, people have looked for ways to help. Many have done that by providing food, school supplies, and making and donating masks. In the months since we were first told to shelter in place, numerous individuals have taken steps to innovate, motivate and alleviate. Many of these acts have come in the form of contributions to charity.
If you wish to make a charitable contribution to an organization involved in combating the pandemic, you have several methods from which to choose. Of course, you can give cash outright to the charity. Donating cash entitles you to a current income tax deduction for the donation, up to 60% of your adjusted gross income if you donate to a qualified public charity. If the donation exceeds 60% of your adjusted gross income, you can carry the deduction forward for up to five years. This simple and straightforward method allows you to make an impact by simply writing a check. However, you may be able to give more or have it cost less if you donate in other ways.
Giving appreciated stock or other appreciated assets will get you a deduction for the full value of the asset, up to 30% of your adjusted gross income. Note that you can deduct the full value of the asset, notwithstanding that you paid much less for it and that had you sold it, you would have incurred up to 20% capital gains, possibly the 3.8% net investment income tax, and any state income taxes. Basically, donating an appreciated asset to charity allows you to take an income tax deduction for the capital gains you eliminated by giving the asset to the charity. If you want to gift stock to a charity, simply ask the charity to provide their transfer information and relay that information to your broker with a direction to transfer the stock to the charity. This method allows you to make a direct impact with a bit of research and a few telephone calls.
If you are contemplating a considerable gift, a charitable trust may appeal to you because it allows you to benefit a charity and yourself or your family. For example, a Charitable Remainder Trust (“CRT”) pays you or your family an income stream either for life or for a term of years and at the end of the trust term, the remainder goes to charity. You receive a current income tax deduction for the value of the charity’s remainder interest, determined actuarially. You receive a current deduction even though the charity receives nothing until many years in the future when the trust term ends. The amount of the deduction varies based upon the term of the income interest, the rate of payment, and the assumed interest rate.
If you have a non-publicly traded asset to contribute to charity, you might consider a Donor Advised Fund (“DAF”). DAFs have become some of the fastest growing charitable giving vehicles. A donor can contribute cash or other appreciated assets to a DAF; however, the DAF’s ability to accept non-publicly traded assets that other qualified charities cannot accept sets the DAF apart from other charitable giving options. If a donor were to give $1,000,000 of cryptocurrency to a DAF, that donor would receive an immediate income tax deduction for the fair market value of the cryptocurrency. The DAF invests the assets which continue to grow while the donor makes recommendations for grants to any qualified public charity usually with a few keystrokes or a telephone call. Once contributed, the assets cannot be returned to the individual donor or any entity other than a charity recommended by the donor. The DAF may allow the donor to name a successor advisor to make recommendations for continued charitable giving upon the donor’s death or incapacity.
The Qualified Charitable Distribution (“QCD”) presents another option to consider if you are taking distributions from your traditional Individual Retirement Account (“IRA”). If an individual makes a charitable contribution from an IRA that does not qualify as a QCD, the Internal Revenue Code treats the contribution as a distribution and includes it in the owner’s gross income. This occurs whether it was a direct transfer from the IRA custodian to the charity or distribution to the owner who subsequently made the transfer to the charity. The owner could take a charitable contribution deduction, but only as part of itemized expenses (unless the deduction falls below $300 for an individual or $600 for a married couple). With a QCD, the owner directs the IRA custodian to transfer funds directly from the IRA to the charity. The QCD excludes the distribution from the owner’s income while satisfying the Required Minimum Distribution (“RMD”). The QCD counts toward any RMD for the year and can begin at age 70 ½ notwithstanding that age 72 now represents the beginning age for RMDs after the Secure Act. The QCD presents a powerful charitable planning tool for anyone required to take RMDs or for those age 70 ½.
This article merely scratches the surface of the myriad options available for charitable giving. If you are charitably inclined, explore these and the many other potential strategies with a qualified estate planning attorney. An attorney who specializes in this area can help you understand all the charitable giving options and the best way to structure your gift to achieve maximum impact.
Tereina Stidd, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128