By Tamir Dardashtian, Adam Rubinfeld Published on December 15, 2021
Source: Worth
Photo Source: Unsplash, Dimitri Karastele
December 24, 2021
Four of the most common charitable strategies experts have helped implement with their high net worth clients.
Charitable contributions have always been a focal point of tax planning, but the COVID-19 pandemic caused an uptick in charitable donations with additional taxpayer benefits from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and strengthened by the American Rescue Plan Act. Some of the most common charitable strategies that we have helped implement in our planning work with high net worth clients are outlined below. Qualified Appreciated Securities One of the most common strategies employed is when taxpayers contribute qualified appreciated securities to public charities. Qualified appreciated securities (QAS) are securities that are publicly traded on an established securities market and held for a long-term period of over a year. A taxpayer is allowed a fair market value deduction up to 30 percent of adjusted gross oncome (AGI) for the donation of this asset to a public charity. This strategy is ideal for taxpayers because tax on the capital appreciation is never realized. An individual will give up control of these assets upon transfer to the charity, thereby saving on income tax as well as estate tax. Nonoperating Private Foundations Many high net worth individuals will create a legacy in the form of a nonoperating private foundation to support causes near and dear to them. Individuals can make charitable donations just as they would to a public charity, but the difference here is the donations to these organizations are limited. Cash is deductible up to 30 percentt of AGI while securities are deductible up to 20 percent of AGI. Keep in mind that private foundations are legally required to give away at least 5 percent of their investment assets per year. It is also worth mentioning that private foundations tend to incur more professional fees. This is due to the set-up costs associated with the filing of the initial exemption application, together with annual return filings. Taxpayers who would like to avoid these additional costs should consider a different not-for-profit vehicle.
Donor-Advised Fund Individuals might support many different philanthropic missions each year, but this can become daunting if the taxpayer is doing their own research. One way to take the stress out of this process is by donating to a donor-advised fund (DAF).
A DAF is a public charity that supports other public charities; contributions are made directly to an account in the donor’s name and held by a fund sponsor.
Recommendations as to how the DAF should disburse the funds to a taxpayer’s favorite charities are made to the fund administrator. The primary advantage of DAFs is that they provide a current tax deduction for funds that may not be disbursed to a charity until months or years later. DAFs also allow an individual to merge several tax-deductible gifts into one tax year—a process that is known as “bunching.” This enables the taxpayer to itemize deductions in a year where they would otherwise be limited to the standard deduction.
Some specialty DAFs might accept more sophisticated assets, such as private equity or real estate investments. As these types of assets are not freely traded on an open exchange, an appraisal is needed to determine the fair market value of the donation. This can coincide well with estate planning, if these assets have appreciated substantially in value and the surviving generation has no use for them.
Accelerate Giving
The CARES Act increased the adjusted gross income limitation from 60 percent to 100 percent for cash contributions by an individual taxpayer to a 501(c)(3) public charity for tax year 2020. This change was enhanced under the American Rescue Plan Act, which sees this increase through tax year 2021. Individuals that have sufficient cash might choose to donate to a public charity to fully maximize their giving by the end of the year. As we all anxiously await the Build Back Better Act, the possibility of higher taxes in future years causes taxpayers to think about accelerating income into 2021. If this is the case, more charitable giving will be allowed with this additional AGI. With the suspension of the AGI limitation for cash, individuals can take advantage of both the 30 percent and 20 percent limitations because the ordering rules provide the 100 percent limitation to be taken after other current-year AGI limits and the carryover items. Taxpayers can utilize these carryover items when they would usually be lost after five years. It is worth monitoring projected income towards the end of the year to determine the most tax efficient charitable plan.
In short, there are multiple ways to help tax-efficient philanthropists navigate the evolving world of charitable giving and maximize the benefits. Public charities, including donor-advised funds, and even nonoperating private foundations are all worth considering to achieve an individual’s philanthropic goals, whether they are concerned with income tax savings, estate tax saving, or both.
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