As we begin wrapping up the year, it’s time to think about year-end financial considerations. For many of us—whether it’s for philanthropic reasons or tax planning reasons (and it’s likely both)—one of those is charitable giving.
Choosing a Gifting Vehicle
If you tend to simply write checks at the end of the year, there may be a more financially efficient way for you to give. Let’s look at a few of the most common.
Gifts of appreciated stock are an easy way to avoid the capital gains tax you’d pay on an appreciated asset upon its sale while receiving a charitable deduction for the full value of the stock. Most charities do accept securities, and you can also use a donor-advised fund to give to those that aren’t able to accept stock.
Another strategy is to first sell stock that has decreased in value—generating a tax loss you can use to offset capital gains income—then gift the sale proceeds, which further results in a charitable deduction.
A donor-advised fund can be useful if you’re looking to generate a charitable deduction in 2015 but aren’t sure where you want your money to go. These funds allow you to gift cash, appreciated securities, and other appreciated assets to the charitable organization that runs the donor-advised fund—such as Schwab Charitable or Fidelity Charitable—which in turn gifts the value of the assets to the charitable organization of your choice. You can also give through a community foundation that acts as a donor-advised fund. Once you’ve had time to think about where you want the funds to go, you can direct the money to the recipient you choose.
Choosing to gift through a donor-advised fund doesn’t mean you need to forgo the convenience of checkbook giving, especially if you rely on checks to give to your child’s school, auctions and gala dinners, or other events. For these kinds of gifts, you can direct that checks be sent from your donor-advised fund. Note, however, that you can’t use a donor-advised fund to pay off a previous pledge.
Donor-advised funds can also be a way to involve your children or other family members in charitable giving, since multiple authorized users are permitted to direct where gifts go. Additionally, they can offer anonymity in your gifting if you’d like to keep your giving information private.
It’s getting late in the year to consider more complex gifting vehicles such as charitable trusts, but the current low interest rate environment will continue to be beneficial for charitable lead trusts into 2016.
Charitable lead trusts allow you to transfer assets that either produce income or are expected to experience strong growth to your heirs while providing a gift to a charity in the form of income during the term of the trust. You get a tax deduction for the value of the income stream going to charity—so the lower the discount rate, the greater your tax deduction. The assets remaining in the trust can be left to your heirs. The value of your gift to your heirs is the fair market value less the gift to charity, which means the charitable gift completely offsets the gift going to your heirs, making it effectively $0 for estate and gift tax purposes.
Charitable remainder trusts are the reverse of charitable lead trusts. The income beneficiary can be you or someone else, and whatever remains in the trust at the end of the trust term goes to charity. These trusts aren’t as attractive in low interest rate environments, but they may be worth considering for the future depending on your charitable goals and your income needs.
Even if you aren’t able to create a charitable trust to meet your giving needs in 2015, you may want to begin the process now if you’re interested in having one for future tax years.
Our 2015 year-end tax planning guide provides a wealth of information on charitable giving strategies, including how they may impact your estate and retirement planning, alternative minimum tax liability, and lifetime gift exclusion. It also provides key information on other ways you can reduce your tax liability in 2015 and beyond. See our related tax planning infographic for a few of the most important topics individuals should consider.
As the year winds down, take some time to read through the opportunities in the 2015 tax guide and talk with your advisor about options that may be a good fit for you, your family, and your business.
While you may be focused on finalizing your charitable gifts for 2015, remember that it’s not too early to start thinking about how you can make your 2016 giving as efficient and effective as possible. As you make your final 2015 gifts, take advantage of the opportunity to review your giving methods, habits, and goals, since these will provide insight you can apply toward your 2016 giving strategy.
Contact us to learn more about how you make the most of your charitable giving and which solutions may work best for your personal financial situation and goals.