One of the most gratifying things about this profession is that our clients entrust us to help them achieve their financial, and often non-financial, goals. We work with many wonderful people who have big hearts. Many times, after finding peace of mind that their retirements are intact, clients will look for opportunities to help others, whether that be their families, organizations they believe in, or both.
Charitable giving strategies can be as simple as giving cash in a basket at church to very complex trusts that can be quite expensive to set up and manage.
Today I’m going to walk through three common charitable giving strategies we assist clients with to help them accomplish their goals in the most tax efficient way possible. Each strategy will be presented through a fictional story of Steve and Jill to show how different stages of life can present different opportunities for how you give to organizations you believe in.
Meet our fictional husband and wife, Steve and Jill. Steve and Jill are both 55 years old, they have 1 child together, and both have a strong working career. Steve works for a national retail company in operations, reporting directly to the COO. Jill is a drug rep for a nationally known pharmaceutical company. They both started from humble beginnings, married young, and slowly built their household balance sheet through maxing out their 401(k) contributions, paying down debt, investing in a non-retirement joint brokerage account, and living below their means. Their daughter just graduated college pre-med and is moving on to her doctorate program in anesthesiology. They helped fund her undergraduate through diligent savings, but her graduate program will be fully funded through scholarships and grants! They are over the moon proud of her.
Other than their daughter and their careers, the other thing that is important to them is their local church. The people they shake hands with every Sunday morning are also the people they spend time with when they are not at church. They include the people they go to ballgames and concerts with, coworkers, and their daughter’s friend’s parents. The church also helps organize important events to give back to the community they grew up in, including monetary gifts to single mothers, housing assistance to veterans, and meal assistance on Thanksgiving and Christmas holidays.
1. Gifting of Appreciated Stock
Steve and Jill both anticipate working until 65 for full Medicare benefits. In the meantime, they continue to give to their church on a weekly basis. Due to the high Standard Deduction as a result of the Tax Cut and Jobs Act, they can never claim their charitable donations but that doesn’t bother them. This year, the church is seeking funds to rebuild their kitchen. After the rebuild, they estimate they will be able to produce double the holiday meals! Steve and Jill would like to help and decide they want to give an additional $10,000. Instead of using cash, their advisor recommends they use stock that they purchased back when they were in their 30s. The stock was worth $1,000 when they purchased it but now is worth $10,000. Their advisor helps them transfer the $10,000 worth of stock directly to the Church. Steve and Jill can take an additional $10,000 worth of deductions, despite only having originally spent $1,000 on the stock, which gets their itemized deductions larger than the standard deduction. By transferring it directly to the church, it also saves Steve & Jill from having to pay the long-term capital gains on the $9,000 of growth!
2. Using a Donor Advised Fund
A few years later, Steve and Jill are 60 years old and continue to meet with their advisor to make sure they are on track for their retirement goals. Jill retired last year but Steve was planning on continuing to work until the age of 65. At their most recent meeting, Steve let the advisor know that the private company stock he owns in his company has 10Xed over the last few years. When Steve retirees and liquidates his stock, he is going to get a significant lump-sum payout. After discussing the numbers, the advisor lets Steve and Jill know they can retire today!
Steve and Jill take some time to think through things and ultimately decide to take the plunge into retirement. They share with their advisor that they want to make significant contributions to their church over the next few years to help with their veteran housing assistance program. The contributions will help fund multiple new homes for veterans, but the funds won’t be needed all up front. The advisor suggests Steve and Jill use a Donor Advised Fund. The advisor explains that Steve and Jill should make a one-time contribution into the Donor Advised Fund (DAF) for all expected future contributions for the new home builds. As a result of the one-time DAF contribution, they will receive a substantial tax deduction to offset the very large amount of tax due from Steve’s stock liquidation. The funds can then sit in the DAF and Steve and Jill can direct the DAF on how to invest the funds as well as when and how much funds should be distributed to fund the housing assistance program. While the funds are in the DAF, they continue to grow tax free for the benefit of the charity!
3. Qualified Charitable Distributions.
Steve and Jill are now 70 years old. They have been loving retirement, traveling to many wonderful places. Their daughter is established in her career as an anesthesiologist and is doing very well. Steve and Jill continue to help out the church monetarily but don’t anticipate any other one-time or substantial giving. They give their normal tithe and are proud of the new homes that were built over the last decade to assist local veterans. Their advisor let them know at a recent meeting that their retirement and financial plan continues to look healthy. Since they were born after 1960, their first Required Minimum Distribution is not until they turn age 75. However, their advisor lets them know that because they are over 70.5, they can now make Qualified Charitable Distributions. Their advisor explains that qualified charitable distributions allow Steve and Jill to take distributions directly from their Traditional IRAs and send them to the church tax-free! Prior to 70.5, Steve and Jill had been taking distributions from their IRAs to their checking accounts and then sending them to the church. All of those previous distributions were taxable as ordinary income; however, now that the distributions will be coming straight from the IRA to the church as a QCD, they will be non-taxable!
This fictional story of Steve and Jill helps show a few scenarios in one’s life that can lead to different charitable giving strategies. If you or someone you know has charitable aspirations, please reach out to us at 219-465-6924.
Mark Rosinski, CFP®, CPA
Wealth Advisor
Kotys Wealth Professionals
