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Financial Planning > Tax Planning

How to Simplify and Enhance Charitable Planning

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Wealth managers understand that the complexity of any given client plan commonly corresponds to the overall net worth of the particular client. That certainly makes sense. A client with a higher net worth requires more complex strategies to meet the planning needs associated with greater wealth. There are instances, however, when a high net worth client can achieve specific planning aims without the typical complexity that we may expect. Sometimes a simple and effective solution can work best.

Charitable planning is consistently mentioned as a primary goal for high net worth clients. It provides several benefits, including the highly desired results of tax efficiency and moral satisfaction. But how clients and wealth managers go about achieving these results can differ greatly in complexity and overall effectiveness. Though charitable lead annuity trusts, charitable remainder trusts, and private foundations have their rightful place within charitable plans, many clients can satisfy their intentions by implementing one or more of the following, simpler strategies.

In a profession where “complex” planning is often confused with “better” planning, it is important for wealth managers to consider the simple solutions that can lead to the same or even more advantageous results. Too often I have reviewed previously implemented plans that are so complex the clients don’t understand how they work or why they were implemented.

Qualified plans and IRAs

When a client expresses charitable intent, it should prompt the wealth manager to review the client’s existing assets to determine how the goal can be met while providing maximized tax efficiency. When a charitable bequest is a component of a client’s estate plan, qualified plan and IRA balances are excellent candidates for identifying assets to be left to charity.

Qualified plans and IRAs are income in respect of a decedent (IRD) items. IRD items maintain their tax character in the hands of the account’s beneficiary. This means that, upon distribution, a noncharity beneficiary who inherits a qualified plan balance or an IRA will owe the ordinary income tax associated with the balance. But a public charity with tax-exempt status will not pay income tax upon receipt and distribution of the IRD items. By naming a charity as the beneficiary of a qualified plan or IRA, a client can maximize the amount left to the charity without the drag of tax liability. At the same time, the client’s estate will receive an estate tax deduction for the total amount passed to the charity. This simple strategy can provide significant income and estate tax benefits to the client.

For clients who wish to make gifts to charity while they are alive, an IRA is not the best option, as the client would incur income tax liability upon distribution of the amount that he or she will subsequently gift to the charity. Although a tax deduction may be available for the donation, there is a possibility that the deduction will not fully offset the tax liability associated with the distribution because of adjusted gross income limits on charitable deductions.

Talk continues about legislation to extend the charitable rollover option available in recent tax years. The charitable rollover allows certain individuals (at least age 70 1/2 ) to make gifts directly to the charity without recognizing the income associated with the distribution. At this time, however, legislation extending this option has yet to be passed. Keep an eye on this, as the option could represent a highly effective and tax-efficient means for older clients with IRA balances to meet charitable goals during their lifetime.

Stock and donor-advised funds

With an impressive rebound in equity prices following the tumultuous downturn in 2008 and 2009, clients are becoming more comfortable about charitable giving. During the crisis, clients didn’t have the appreciated stock positions with which to consider making gifts. Moreover, they feared losing everything, which severely diminished the desire to give to charity. But capital gains have returned for many; with those gains has come the desire to fulfill charitable goals.

A gift of long-term appreciated stock has always been considered one of the most tax-efficient methods of making a donation to charity. When a client gives a share of appreciated stock to charity, he or she receives two immediate benefits. First, the client gets a charitable income tax deduction equal to the fair market value of the stock upon the date of contribution. Second, he or she completely avoids the long-term capital gain tax associated with the gifted position because the charity is tax-exempt and won’t have to pay tax upon liquidation of the shares. Clients who make gifts to charity should always seek out capital assets with a built-in long-term capital gain as the asset to gift.

Taking this very simple concept a bit further, the client could consider a donor-advised fund (DAF). A DAF is an account through a public charity to which a client can make charitable gifts. The client receives a charitable income tax deduction for the gift to the DAF and assumes the role of a grant advisor to the DAF account. As the grant advisor, the client can submit a grant recommendation to DAF board members requesting that a distribution from the DAF account be made to a public charity of his or her choice. In most instances, assuming that the specified charity is an IRS-approved entity, DAF board members will approve the distribution on behalf of the donor-client.

For high net worth individuals, the DAF presents a simple solution that can both enhance their charitable planning and their goal of tax efficiency. If your client is writing checks for annual gifts to charities as a common line item in his or her expenses, that same client may benefit from funding a DAF with appreciated property. He or she can use the DAF balance as the source of annual gifts that would otherwise have been made from a checking account.

A DAF funded with appreciated securities is more tax-efficient and could be timelier, when considering the available deduction. If a client experiences an especially high-income tax year, he or she may find additional benefit by making a large contribution to the DAF today–when the tax deduction is most valuable to him or her–instead of making smaller donations over several years.

The DAF is a strategy that allows clients to “front-load” future charitable donations, affording them the immediate receipt of the tax benefit and permitting donations to be dispersed in future years, when the clients deem the donations appropriate.


As mentioned previously, there will always be a place for complex solutions within client plans, but there are instances when simplicity provides results that are equally effective. But although the strategies described here are relatively simple, they require a review by a client’s CPA and attorney before implementation to ensure the desired results will be achieved as planned.

Gavin Morrissey is the director of advanced planning at Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser, in San Diego, California. He can be reached at [email protected].


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