Older Clients’ Charitable Vehicles Require Extra Tax Planning
Age and wealth often make clients more charitably inclined. But it’s important for them to plan for how they’re going to gift their cash and assets and how it will affect their taxes. For example, clients might end up paying more in taxes than they should have by structuring […]
Age and wealth often make clients more charitably inclined. But it’s important for them to plan for how they’re going to gift their cash and assets and how it will affect their taxes.
For example, clients might end up paying more in taxes than they should have by structuring their donations the wrong way—say if they sell stocks, pay capital gains on those stocks and then donate the cash to charity.
Instead, they might want to “consider gifting long-term, highly appreciated securities to fund charitable activities,” said Sam Petrucci, head of advice, planning and fiduciary services at Neuberger Berman Private Wealth in New York. “This offers an immediate, full fair-market value deduction … and exempts them from capital gains taxes on the [donation].”
There are other things to consider: A client must itemize deductions if they’re going to take a charitable deduction that equals up to 60% of their adjusted gross income.
Inflation put a crimp in people’s charitable giving in 2023, according to Giving USA’s last annual report. Yet that giving was still in the hundreds of billions of dollars.
How can wealthy clients who are still keen on giving do it to their best tax advantage?
One answer is for them to give directly from retirement plans. Owners of traditional IRAs who are 70½ or older can transfer amounts in the low six figures to charity tax-free each year as qualified charitable distributions. For clients who are at least 73, these distributions count toward the IRA owner’s required minimum distribution for the year.
This is a good tax move, said Jody R. King, a CPA and director of wealth planning at Fiduciary Trust Company in Boston. It lets givers “donate up to $105,000 per year directly to qualified charities without recognizing the associated taxable income.”
Todd Neal, a client management partner at Callan Family Office in West Palm Beach, Fla., said that instead of gifting over years, some clients should bunch their charitable gifts into a single year to possibly take advantage of a larger charitable deduction, “especially with the current limitations or suspensions of several other itemized deductions,” he said. The tactic, however, doesn’t work for all clients and might require analyzing a multiyear pattern of giving.
Again, many clients are quick to donate cash, advisors say, but in some instances donating stock can bring more tax benefit, Neal said.
“Donating long-term appreciated assets may have multiple benefits: a deduction based on the [fair market value] of the donated asset and the ability to avoid paying capital gains tax on the asset’s unrealized appreciation,” he said.
If giving is the plan, it’s crucial not to sell a stock before donating it if you want to head off the assessment of capital gains. The tax savings are larger when you are giving a stock that’s been held more than a year, which means it’s eligible for fair-market-value treatment and the generally higher deduction, advisors say.
Stock tactics also figure in funding trusts used for charity, particularly the value of stocks over time. “A client may have funded a grantor trust with a concentrated stock position that has very low basis but high upside [gain],” said Kim Kamin, partner and chief wealth strategist at Gresham Partners in Chicago. Grantor trusts give an up-front deduction but do create taxes for the grant owner on earnings in the future
“As the client gets older and the time horizon for that upside decreases,” Kamin said, the client should replace the low-basis stock with high-basis assets in the grantor trust.
Older clients who want to minimize their taxes on gifting, she said, should fully use their gift and generation-skipping trust tax exemptions when they’re putting assets into grantor trust before the exemptions possibly sunset under the law in the future.
Some gift tax breaks aren’t going to expire, and it can be a smart tax move for clients to use their lifetime gift tax exemption by funding irrevocable trusts, since it whittles future asset appreciation from the grantor’s estate, King added. “Annual exclusion gifts can be powerful over time, as can paying tuition or medical expenses directly to the provider since doing so does not count as annual [currently $18,000] exclusion gifts,” she said.
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