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Financial Planning > Charitable Giving

Optimizing Clients’ Charitable Giving This Season

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With equity markets rebounding, job numbers increasing and the economy generally being on more sound footing, 2016 may be the right time for clients to think about increasing their charitable giving over previous years when financial times were more uncertain.  harities have undoubtedly felt the impact of the economic instability of previous years and need to replenish their reserves to continue providing for the community in good times and bad. 

The equity markets have bolstered IRA and retirement portfolios, so for those that qualify, a Qualified Charitable Distribution (QCD) (commonly known as the Charitable IRA Rollover) may be a better choice than traditional charitable giving: 2016 marks the first full year the rule is permanently in place.

Unfortunately, clients are still largely unaware of this planning strategy unless raised by their financial or tax advisor. Part of the issue is that the QCD is not broadly available to everyone, but only to those who are over age 70 ½ years and subject to required minimum distributions (RMDs) on their IRAs. Advisors need to educate clients who fit the requirements for QCDs of its potential benefits.

QCDs are useful for those clients who are required to take RMDs from their IRAs, don’t need the income, and want to avoid the increase in income taxes that the RMD would generate – all while making a difference.  In that regard, a QCD is superior to taking a RMD from an IRA, paying taxes on that income, and then making a charitable contribution. 

RMDs increase adjusted gross income which may result in several adverse consequences, including, among others: 

a) putting the taxpayer into a higher income tax bracket;

b) raising Medicare premiums;

c) raising taxes on Social Security benefits;  

d) limiting itemized deductions.

A QCD avoids all that and also satisfies that year’s RMD requirement. With respect to the charities that may be recipients of these distributions, they must be public charities as described in IRC Section 170(b)(1)(A).  They cannot be private foundations, donor advised funds or charitable supporting organizations.

The markets have also grown brokerage accounts leaving clients with capital gains issues. Appreciated securities might be ideal assets for outright charitable gifts or for use in charitable remainder trusts. 

This year may also be a better year for substantial gifts by high income and high-net-worth donors because of the uncertainty that has been created by President-elect Trump’s tax proposals. 

His tax proposals may result in a decrease in taxpayers itemizing deductions because of a higher standard deduction, and capping itemized deductions for those that do itemize. Gifts of appreciated assets are useful for those clients seeking to make a difference in the community while avoiding capital gains taxes.  

Charitable giving is not one-size-fits-all. Americans, generally, are very charitably inclined and whether they’re modest or high income, middle-class or high net worth, there are many different ways to give to charity beyond check-book philanthropy. In fact, from a tax and financial planning perspective, writing a check to your favorite charity is often not the most tax efficient way to give, nor is it the right solution for the individual based upon their needs, goals and objectives. 

Many clients do just that because they are unaware of other charitable giving strategies and how they may be employed in their own situation. 

Other strategies include charitable remainder trusts, charitable lead trusts, donor advised funds, private foundations, testamentary bequests, beneficiary designations, and more.  Asset identification should also be employed to appropriately choose the right asset to give (i.e., cash, securities, life insurance, real estate, collectibles, etc.). 

Everyone should talk to their tax and financial advisors to determine the best way to give for their own situation. 

The Guardian Life Insurance Company of America® New York, NY. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice.


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