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Charitable giving for the greater good

Dec 02, 2022 | Gerry Spessard


Charitable giving can be a powerful financial tool. Gerry Spessard discusses how contributing to the causes that matter most to you can also potentially lower your tax bill.

Charitable giving for the greater good

Supporting the causes you are passionate about—whether that’s giving back to your local community, making a social impact or showing gratitude to a hospital that cared for a loved one—can be enormously fulfilling.  For many, charitable giving is an emotional, even spiritual act—something we do not because we must, but because we choose to do so. When we give, we pass on our beliefs and values, not just our money. Giving also forges deeper connections to our families and communities, instilling a sense of satisfaction that we’re working together to create a better world.

Research has found that there may also be more subtle, personal benefits to supporting your favorite causes through philanthropy including stress reduction, greater self-esteem and life satisfaction, a reduction in negative emotions and increased overall happiness.

In addition to contributing to an organization or cause you feel passionate about, charitable giving can be a powerful financial tool. It provides double satisfaction—by helping a worthy cause, and possibly lowering your tax bill.

Three potential tax benefits

• You may receive an income tax deduction in the year you make the gift, subject to AGI limits

• The federal gift tax does not apply to charitable gifts

• Charitable gifts may help reduce your potential estate tax liability

Other potential benefits

• Transform an illiquid asset into an important source of future income 

• Restructure a non-diversified portfolio without incurring an immediate capital gain 

• Help avoid current capital gains tax on the sale of a business 

• Take an immediate tax deduction on an irrevocable future gift to charity

There are a number of strategies, each with its own advantages and benefits, that can be used for effective philanthropy.

1.Outright Giving

Outright giving is the easiest. As the name implies, this is simply writing a check to a favorite charity. The dollar amount qualifies as a tax deduction as long as the charitable organization is recognized as such by the IRS.  Even better than cash, an investor can gift a highly appreciated stock, receiving a deduction for the current market value. The charity sells the stock, and because it is tax-exempt, there is no capital gains liability.<

2. Qualified Charitable Distributions (QCDs)

This strategy is applicable for clients who are 70 ½ years old. They can donate up to $100,000 from an IRA directly to a qualified charity without triggering any federal income taxes.  This strategy would reduce the taxable income for the IRA owner, since he or she would not be receiving the income that he/she has designated for a QCD.

3. Donor Advised Fund (DAF)

Donor advised funds are great structures for a number of different scenarios. For one, they are fairly easy to establish. Second, the donor receives a tax deduction at the time the money goes into the DAF. Third, the donor can control the timing of when the gifts go to the charitable organizations and can use anonymity if needed through the titling of the donor advised fund. We tend to see this structure used a lot for clients with the following situations:

• Investors whose charitable donations are below the standard deduction; they can "bundle" a few years of gifting in one year in order to get a tax deduction.

• Investors with a large liquidity event during the calendar year.

• High earners looking for additional tax deductions, but who want to have control of when they distribute the money to charities.

• People who have sizable charitable wishes but who don't want the increased complexity associated with a private foundation.

4. Private Foundation

A private foundation shares many of the same qualities as a DAF, but is generally only established with considerable assets due to its additional complexities. For instance, contributions into a private foundation allow for tax deductions, but at a lower level than a DAF. Private foundations take longer to establish and are more expensive to manage on an ongoing basis. Private foundations have rules that require 5% of the net asset value to be distributed annually. 

5. Charitable Remainder Trust or Charitable Lead Trust

These two structures are effectively the inverse of one another and are often paired. For fear of making this a longer article than intended, we will provide a short synopsis of each.

Charitable Remainder Trust (CRT) - a gift of cash or other investment is made to an irrevocable trust. The donor, and/or other family members, receive a lifetime payment from the trust or for a term not to exceed 20 years. Upon the death of the income beneficiaries, the trust is dissolved and the named charity receives the remaining assets

Charitable Lead Trust (CLT) - a gift of cash or other investment is made to an irrevocable trust. The CLT provides an income to charity over a specified period. At the end of the period, the trust is dissolved and the remaining assets are distributed back to the donor or other named non-charitable beneficiaries. 

As a final note, charitable giving is a topic that is near and dear to our hearts.  At the Hershey Group, we strongly believe in the importance of supporting our local community.  If you are interested in seeing the organizations that we are involved with, please reference the following link: https://us.rbcwealthmanagement.com/hersheygroup/community-involvement

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