Our team at Cerity Partners is continually inspired by the efforts of charitable organizations and want to offer our assistance to boost planned giving campaigns. 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:

  • Gifting highly appreciated securities
  • Utilizing a donor-advised fund to facilitate annual giving
  • Establishing a charitable lead trust
  • Using retirement assets for charitable giving

The following article outlines these four planned giving strategies in detail.

Gifting Highly Appreciated Securities

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

  • Eliminate Capital Gains Tax: By contributing the appreciated security directly to the charity, the donor will be able to avoid selling the appreciated security and realizing the capital gains tax liability.
  • Fair Market Tax Deduction: For taxpayers that itemize deductions, the donor will receive an income tax charitable deduction for the full fair market value of the security at the time of the gift, so long as the security has been held for at least 12 months. The total deduction amount is subject to income limitations as described below.
  • Potentially Give a Larger Donation to Charity: By avoiding the capital gains tax from selling the security, the donor can freely give the entire market value of the security as opposed to selling the security and contributing the net (after-tax) cash proceeds, resulting in a larger total gift to the charity.
  • Portfolio Rebalancing: Donating highly appreciated securities presents an investor the opportunity to address risks of concentration in their portfolio and rebalance to a more diversified allocation.
  • Reduce Future Tax Liability: Furthermore, even if the donor likes the appreciated stock and wants to continue to hold the investment, it is still in their best interest to donate the appreciated security compared to gifting cash on hand. The donor can always repurchase the security after making the donation with cash, which will allow them to reset the cost basis of the investment at a higher value and potentially minimize their future tax liability.

The following example highlights the considerable benefits of gifting highly appreciated securities:

benefits of gifting highly appreciated securities
1 Realized Capital Gain * Capital gains rate. Assumes stock is held for greater than one year.
2 Donation Amount * Income tax rate. Assumes taxpayer is in top tax bracket.
3 Tax value of deduction less capital gains taxes paid (or plus capital gains taxes saved).

Key Considerations

  • Long-Term Investments: Donors should verify that the highly appreciated securities they wish to donate have been held for at least 12 months in order to receive the full fair market value as a charitable deduction. For donations of appreciated securities that have been held for less than 12 months, only the initial cost basis of the investment is allowed to be deducted.
  • Deduction Limitations: Income tax deductions on the donations of appreciated noncash assets are limited to 30% of the taxpayer’s adjusted gross income (AGI). Comparatively, charitable cash contributions are allowed an income tax deduction up to 60% of the taxpayer’s AGI. However, any contribution amount above the deduction limitation can be carried forward for up to five years.
  • Avoid Pre-Arranged Sales: Ensure that there is no legal arrangement whereby the security must be sold upon receipt by the charitable organization, as this could reduce or eliminate the tax benefits of the donation. The charity must reserve the right to control the asset and sell the contributed security at its discretion, even though generally, policy among most public charities is to promptly sell donated securities.
  • Establish a Brokerage Account: Charitable organizations should ensure they have established a brokerage account to receive incoming security donations. The charity should create easy-to-follow donation instructions to make available to donors to facilitate a seamless gifting process.

Utilizing a Donor-Advised Fund to Facilitate Annual Giving

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.

How a Donor Advised Fund 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:

  • Eliminate Capital Gains Tax: Through the contribution of appreciated securities to the DAF, the donor will be able to avoid selling the appreciated security and realizing the capital gains tax liability.
  • Immediate Tax Deduction: Since the sponsoring organization is a public charity, the value of any contribution to a DAF is eligible for an immediate income tax deduction. The same income tax deduction limitations exist as with direct gifting to a charity.
  • Charitable “Bunching” Opportunity: A DAF can allow the flexibility for a taxpayer to make an increased contribution amount (i.e., 3­–5 years’ worth of charitable intent) in a single tax year without the requirement to distribute the entire contribution in the same year. The ability to “bunch” consecutive years of charitable donations into one tax year is a useful tax planning technique as it allows for a larger charitable donation, which can be particularly useful in a high-income year. A DAF provides unique flexibility to accomplish charitable bunching, since it allows donors discretion to distribute grants to underlying charities at the pace and magnitude of gifting that they desire.
  • Tax-Fee Growth of Contribution: In addition to the up-front tax benefits (elimination of capital gains tax and immediate income tax deduction), the contributions to a DAF can provide a tertiary benefit of tax-free growth within the DAF itself. The funds contributed to a DAF can be reinvested according to investment options provided by the sponsoring organization, and any growth generated within the DAF is tax-free. This potential for tax-free growth provides an additional benefit to underlying charities as it can result in higher ultimate distributions to their organizations than may otherwise be contributed from direct gifts.
  • Estate Planning: Finally, a DAF provides valuable estate planning benefits. A contribution to a DAF is an irrevocable commitment to charity, thus removing those assets from one’s estate. The ability to control the distribution of the contributed assets in conjunction with the removal of those assets from one’s estate adds to the appeal of a DAF.

Establishing a Charitable Lead Trust

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:

  1. Charitable lead unitrust (CLUT)
  2. Charitable lead annuity trust (CLAT)

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.

Diagram of how a Charitable Lead Trust works

Key Considerations

There are several considerations one should take into account before creating a charitable lead trust.

  • Charitable lead trusts are not tax-exempt entities and the income generated is taxable.
  • It is important to distinguish between a grantor and non-grantor trust, as the tax treatment differs.
    • A grantor trust is one in which the individual who creates the trust is the owner of the assets and property for income and estate tax purposes, while a non-grantor trust is taxed as a separate legal entity.
    • In a grantor charitable lead trust, the grantor can take an immediate income tax charitable deduction subject to applicable deduction limitations. This benefit should be considered in conjunction with the fact that the trust’s investment income is taxable to the grantor as well.
    • In a non-grantor charitable lead trust, the trust is considered the owner of the assets. Therefore, the individual who created the trust would not be eligible for an income tax deduction, but the trust itself pays the tax on net investment income after the deduction for the annual amount paid to charity.

Using Retirement Assets for Charitable Giving

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:

  • Eligible account types include traditional IRAs, inherited IRAs, SEP IRAs and SIMPLE IRAs. It is important to note that only inactive SEP IRAs and SIMPLE IRAs can qualify.
  • The IRA owner must be 70.5 or older to be eligible.
  • The maximum eligible amount is $100,000 annually. If married, each spouse can make a $100,000 QCD ($200,000 total).
  • For a QCD to count toward an RMD, the funds must be distributed by the RMD deadline, which is generally December 31 each year.

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.

Testamentary Bequests of Retirement Assets

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:

  1. Best Practice: Designate the desired qualified charity as the beneficiary of the retirement account(s) (IRA, 401(k), etc.). This will allow the IRD assets to flow directly to the charity and never enter the decedent’s estate, eliminating much of the obstacles to receive the preferential tax treatment.
  2. Alternative: The estate receives the IRD assets and then distributes the IRD to the specified charity. Under this circumstance, there should be a provision in the will or trust document that specifically designates that any charitable bequest will be made first from IRD assets. While the transfer of IRD will trigger income tax for the estate, the estate can then claim an offsetting charitable income tax deduction.

Considerations for IRD Bequests

  • Avoid pecuniary charitable gifts (gifts of a fixed dollar amount) as they will trigger income tax for the estate without the opportunity for an offsetting income tax deduction. Therefore, to avoid the payment of income tax, charitable bequests of IRD assets should be made in full, fractional or residual amounts as opposed to pecuniary gifts.
  • Roth IRAs do not fall under the classification of IRD as the tax-free nature of the Roth IRA distribution will continue to apply to the beneficiary.


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

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