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Theodore D. Schneider
January 10, 2023
Our team at Cerity Partners is continually inspired by the efforts of charitable organizations and want to offer our assistance to boost planned giving in this time of critical need. As experienced advisors in financial and philanthropic planning, we believe having focused discussions with potential donors regarding the following planned giving strategies are effective tools to encourage donors to complete an annual gift and can help accelerate your charitable organization’s donations:
The following article outlines these four planned giving strategies in detail.
In most financial circumstances, the motto “Cash is king” is applicable. However, when it comes to charitable donations, that might not be the case. Donors should consider gifting highly appreciated, publicly traded securities when making their annual charitable donations. Gifting appreciated stock is a tax-efficient planning tool and can be beneficial to both the donor and charity alike.
What Are Highly Appreciated Securities?
Appreciated securities are investments that have substantially increased in value since their initial purchase and most commonly take the form of publicly traded stocks, bonds, mutual funds or exchange-traded funds. However, highly appreciated securities can also include nonpublicly traded investments, such as restricted stock or cryptocurrency (e.g., Bitcoin).
Benefits of Donating Highly Appreciated Securities
The following example highlights the considerable benefits of gifting highly appreciated securities:
Closely associated with the direct gifting of highly appreciated securities is the use of a donor-advised fund (DAF). Charitable organizations should inquire with potential donors about their knowledge of donor-advised funds and encourage donors to contribute through a DAF if they already have one established.
What Is a Donor-Advised Fund?
In its simplest terms, a donor-advised fund can be thought of as a charitable investment account. Those with charitable intent can establish a DAF at a sponsoring organization (e.g., a community foundation, investment custodian, bank, etc.), which itself is a public charity. A DAF can be funded up front as well as contributed to on an ongoing basis, and it is able to accept a variety of assets including cash, publicly traded securities, private business interests and other property. The donor then makes grant recommendations to the sponsoring organization to facilitate distributions to the specified public charities. Additionally, there is no annual distribution requirement for a DAF, like there is for a private foundation. Given their flexibility, low cost and tax benefits, DAFs have become an increasingly popular charitable tool. The diagram below is a helpful visual for how a DAF operates.
Benefits of a Donor-Advised Fund
A DAF provides similar benefits as a direct gift of highly appreciated shares, but it can also incorporate a few additional tax planning strategies, such as:
Charitable lead trusts can be an excellent philanthropic vehicle for charities to speak to their donors about. Not only are they valuable tax and estate planning strategies for wealthy donors, but they also provide charities the ability to receive contributions up front for a specified number of years versus charitable remainder trusts, which distribute the remaining assets only at the end of the trust’s term.
What Is a Charitable Lead Trust?
A charitable lead trust is an irrevocable split interest trust designed to provide financial support to one or more charities for a period of time, while the remainder interest is passed on to a designated noncharitable beneficiary.
There are two types of charitable lead trusts:
A charitable lead unitrust is designed to distribute a fixed percentage to the charity based on its year-end balance, whereas a charitable lead annuity trust distributes a fixed dollar amount to the charity each year.
A charitable lead trust works in the following way. First, the grantor, the person establishing the trust, makes a contribution to fund the trust, which is set up to operate during a specific term. The term can range from a set number of years to even the life span of the grantor. Typically, it is best to fund the contribution with cash or a closely held business (assets you expect to appreciate highly). Once the trust is established and funded, payments from the trust are disbursed to the charity or charities as either a fixed percentage or fixed dollar amount. Lastly, at the end of the term, the remainder assets are distributed to the remainder beneficiary of the trust.
Benefits of Establishing a Charitable Lead Trust
Charitable lead trusts can serve as a valuable vehicle to reduce estate and gift taxes, while potentially providing a significant income tax deduction in the year they are created. The immediate income tax charitable deduction is equal to the present value of the future payments that will be made to the charitable organization. In a low interest rate environment, these strategies can be extremely attractive as low interest rates increase the present value and maximize the deduction for the donor.
Let’s take a look at an example assuming a donor contributed $500,000 to a 20-year term charitable lead annuity grantor trust on March 1, 2021. In this example, the donor would be entitled to a charitable deduction for income interest in the amount of $469,840 in the year the charitable lead trust was established and funded, based on a Section 7520 interest rate of 0.60%. Pursuant to the Internal Revenue Code, the 7520 rate is the rate used to discount the value of the annuity stream being provided to the charitable organization. The remainder interest, which is subject to gift tax, is valued at $30,160. However, that figure does not represent what the beneficiary may receive at the end of the trust’s term. Assuming a growth rate of 7% over the 20-year term, the beneficiary of the trust would receive $909,955, with gift tax paid only on the initial $30,160.
There are several considerations one should take into account before creating a charitable lead trust.
When planning your withdrawal strategy from IRA accounts, you may want to consider making charitable donations through a qualified charitable distribution (QCD).
What Is a Qualified Charitable Distribution?
A QCD is a charitable tax-planning strategy that allows an individual to take a withdrawal from an individual retirement account (IRA) and have it payable directly to a qualified 501(c)(3) charity.
Benefits of Making Donations With a Qualified Charitable Distribution
Making donations with a QCD comes with many benefits. For starters, a QCD can be counted toward satisfying an individual’s RMD for the year. For individuals who do not rely on RMDs to support their lifestyle, this can serve as an effective tax planning tool, as the amount donated through a QCD is excluded from taxable income. This can potentially help an individual remain in a lower tax bracket, as well as reduce potential exposure to the Medicare surtax, decreasing their overall tax consequences.
Typically, individuals who claim the standard deduction are not allowed to itemize charitable donations. However, because a QCD is not included in taxable income, charitable gifting remains an option even if one claims the standard deduction.
To qualify for a QCD, the following criteria must be met:
Key Considerations for Qualified Charitable Distributions
To qualify, the receiving charity must be a 501(c)(3) organization and be eligible to receive tax-deductible contributions. Unfortunately, not all charities qualify. Private foundations, supporting organizations and donor-advised funds are some that would not be considered eligible for an individual to make a QCD.
In addition to QCDs during a donor’s lifetime, retirement funds are also attractive assets for charitable bequests at a donor’s death. Using an IRA (or other qualified retirement assets) to make a testamentary gift to charity has become an increasingly popular gifting strategy and estate planning technique, given its valuable tax benefits. Qualified retirement accounts carry with them what is called “income with respect of a decedent” (IRD). IRD is defined as income generated during a decedent’s life but not realized until after their death. IRD assets are includable in a decedent’s estate as well as create an income tax liability to their beneficiaries at the owner’s death, resulting in the potential for double taxation of IRD assets.1 For most estates, retirement assets (IRAs, 401(k)s, pensions, etc.) represent the largest source of IRD. For estates that are charitably inclined, it is advantageous to use IRD assets as the primary source of testamentary charitable giving as it will allow these assets to be excluded from the estate and escape the liability of double taxation (estate tax and income tax).
Structuring an estate that is charitably inclined with IRD bequests provides a mutual benefit for the charity, estate and remaining estate beneficiaries. Since charitable organizations are tax-exempt entities, they are exempt from having to pay any income tax related to the bequests of IRD assets and thus retain the full dollar amount of the gifted IRD assets. For an estate, gifting retirement funds allows IRD assets to leave the estate, reducing the overall value of the estate. Furthermore, if the estate prioritizes IRD assets to charity and leaves the non-IRD assets, which receive a step-up in basis, to the remaining beneficiaries, those beneficiaries will not have to take on the income tax liability associated with those IRD assets.
There are two ways to structure bequests of IRD assets to charity:
Considerations for IRD Bequests
We encourage you to reach out to your Cerity Partners advisor to learn more about these valuable planned giving strategies and how we may be able to assist you in guiding your patrons across the “giving line.” Additionally, it should be noted that these planned giving strategies represent a list of some of the most effective techniques for donors. However, they are not an exhaustive list as there are various other philanthropic strategies that may be in the best interest of a prospective donor, depending on their unique circumstances.
1 Internal Revenue Code Section 691
Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with office locations throughout the United States. Registration of an Investment Advisor does not imply any level of skill or training. The foregoing is limited to general information about Cerity Partners’ financial market outlook. You should not construe the information contained herein as personalized investment, tax, or legal advice. There is no guarantee that the views and opinions expressed in this commentary will come to pass. The information presented is subject to change without notice and should not be considered as an offer to sell or a solicitation of an offer to buy any security. Material economic conditions and/or events may affect future results. Before making any decision or taking any action that may affect your finances or your company’s finances, you should consult a qualified professional adviser. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees, conflicts of interest, and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
Cerity Partners conducts due diligence to identify appropriate ESG and SRI investment funds or sub-advisers (collectively “ESG Managers”) that are made available to its clients. Cerity Partners does not represent or claim to be signatories to any specific national, regional or global ESG and SRI frameworks, including those promoted by the UN Principles for Responsible Investment (PRI). Cerity Partners does not provide investment management of designed ESG/SRI individual equity or fixed income models, but rather selects the ESG Managers who perform these functions for clients. Cerity Partners conducts periodic reviews of the ESG Managers to monitor for changes to their platform and compliance with their stated ESG mandates offered by the ESG Manager. A client may request Cerity Partners purchase certain securities in the client’s account considered by the client that meet a client’s standard of ESG/SRI. Clients may change ESG Managers at any time with the exception of private illiquid funds that invest in ESG or SRI objectives.
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Theodore D. Schneider is a Principal in the New Jersey office. He assists in the composition and maintenance of client portfolios and conducts detailed research...
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