Charitable Tax-Planning

Charitable giving may help you minimize taxes while also supporting the causes that are meaningful to you.

You can give to a charity, such as a church, college, or other qualified charitable organization in your will or during your lifetime. It’s important to balance your income needs and the needs of your beneficiaries with the tax benefits of giving now, as well as the ability to enjoy the act of giving during your lifetime.

Before you choose a way to give, it’s important to understand the tax implications of your decisions. Giving as much as you want to charity during your lifetime and after you’re gone may help to reduce federal estate and gift taxes significantly.

Gifts made to charities, specifically, are exempt from gift tax.

Lifetime giving
Generally speaking, lifetime gifts to charities can result in an income tax deduction for you. But before you make a sizable gift, be sure to seek tax advice. You’re eligible for itemized deductions for charitable contributions up to a certain percentage of your adjusted gross income for cash contributions. Another limit applies for contributions of appreciated securities or property in any one year. You may be able to carry forward amounts that exceed the limit and deduct them over the next five years.

Highly appreciated securities may be good candidates to give to charity during your lifetime; in addition to the income tax deduction, you bypass the capital gains tax that would be owed if you cashed them in yourself.

Specialized options for charitable giving
Whether you choose to give during your lifetime or in your will, donor-advised funds are charitable giving programs, generally run by public charities or financial institutions, such as Fidelity. They allow you to give on a basis intended to maximize your income tax situation and help meet the needs of the causes that are meaningful to you.

If you have the means and desire to play an active role in philanthropy, you might also consider establishing a private foundation. Foundation managers retain control over the investment of their foundation assets, as well as which charities will receive grants from the foundation. In addition to charities, foundation grants can be used to support individuals for hardship reasons and even scholarship programs. Along with this flexibility, however, is a significant amount of administration.

Trusts
A charity can be the beneficiary of a relatively simple revocable trust or irrevocable trust. Other giving strategies using charitable trusts can provide benefits to charity as well as to your family or yourself.

A charitable lead trust lets you provide a payout to a charitable cause during your lifetime (or a term of years) and preserve assets for other beneficiaries, such as children or grandchildren. The value of the remainder gifted to your descendants will be a taxable gift if the trust is funded during your lifetime, or subject to estate tax, if the trust is funded at your death.

If you have substantially appreciated assets (such as real estate or stocks), you can reduce current capital gains tax on the assets by contributing the assets to a charitable remainder trust. You can also give a portion of the current value of your assets to charity, and generate a payout from the trust to yourself or someone else during your lifetime, or for a specific term.

Ensure your beneficiaries are up to date on other assets that have provisions for naming them, including investment and bank accounts with transfer on death (TOD) designations. This is especially important for beneficiaries outside your immediate family, as assets don’t usually go to such beneficiaries by default or outside of the probate process if they are not named properly.

Retirement accounts
Retirement assets may be good candidates for charitable bequests because they can be among the highest taxed assets in any estate. Leaving your retirement assets to a charity has two distinct advantages:

  • Increasing the impact of your bequest. The charity would not have to pay income taxes on your donation when it receives assets from your retirement account.
  • Decrease the estate tax burden for your family. Your assets would pass directly to the charitable organization, so your estate would be eligible for a federal estate tax charitable deduction on the account’s value.

As always, make sure your beneficiary designations are up to date; with missing or incorrect designations, your assets may not be distributed as you intend or your charitable beneficiaries may have to wait to take ownership and incur costs due to probate.

The rules for 401(k)s and other qualified retirement plans are similar to those for IRAs. If you are married and you want to designate beneficiaries other than your spouse, you may need written consent from your spouse.

Otherwise, such plans follow roughly the same guidelines for what is taxable, but other features will vary from plan to plan. Contact the plan’s administrator for specific rules governing yours.

Attorney and Estate Planning specialist Anthony G. Celaya assists clients throughout Napa, Yountiville, St. Helena, Calistoga, Sonoma, Vallejo, Benicia, Fairfield, Suisun City, and Vacaville in Napa County and Solano County, but also in Sonoma County, Contra Costa County, Alameda County, Marin County, Santa Clara County, San Mateo County, San Francisco County, Sacramento County, and other Northern and Southern California areas.