Key Points

• Philanthropy creates a lasting legacy, supports causes, and fosters social change for high-net-worth individuals.

• Following a few tax planning strategies, there are ways to increase the tax efficiency of your gift to maximize philanthropic dollars. 

• Working with an independent financial advisor can help optimize tax-efficient charitable giving.

Americans gave $484.85 billion to charities in 2021. Philanthropic giving holds immense value beyond the act of helping others. Philanthropic contributions often provide personal fulfillment and can even strengthen family bonds through shared values and common goals. For those who have the means and desire for charitable gifting, there are several tax strategies to optimize tax implications in a beneficial way.

Why Should I Consider Philanthropic Giving?

Philanthropy has been evolving rapidly, reflecting the changing dynamics of society and individual aspirations. Recent trends in philanthropy shed light on the innovative approaches to meet personal charitable goals while using tax efficiency strategies to maximize tax deductions and the value of philanthropic dollars. 

Ways to Maximize Your Philanthropic Giving

Recent trends in philanthropic giving shed light on the innovative approaches adopted by high-net-worth individuals.

1.     Donate appreciated non-cash assets

Gifting appreciated securities instead of cash is a win-win for both the donor and the charitable organization. By donating appreciated securities, both the donor and organization are exempt from taxation on long-term capital gains. In addition, the donor is able to claim a charitable tax deduction for the full fair market value of the appreciated securities donated.

2.     Set Up Donor-Advised Funds

Donor-advised funds are one of the most tax-efficient tools to utilize in philanthropic giving. A donor-advised fund allows the donor to claim a tax deduction for the full value of the initial contribution into the fund. It has the flexibility to recommend grants over time to multiple public charities of their choice. The assets invested within the fund grow tax free and avoid capital gains tax when liquidated. A high-income taxpayer with significant charitable intentions can use this strategy year after year or use it selectively in higher income tax years to maximize income tax deductions and ultimately reduce overall taxable income.  

3.     Make a Qualified Charitable Distribution (QCD)

You may not realize it, but if you’re over 70½, you can give a charitable gift from your IRA. It’s called a Qualified Charitable Distribution and the money goes directly from your IRA to a qualified charity. This donation satisfies your required minimum distribution (RMD) and also avoids federal and state income tax, the ultimate tax saver!

The IRS Secure Act 2.0  has pushed RMDs out to as late as 75-years-old; however, if you’re currently taking RMDS or at least 70½, you can start making qualified charitable distributions from your IRA. This is a great way to avoid ordinary income tax on IRA distributions while supporting charitable causes.

4.     Establish a Charitable Trust

There are two types of charitable trusts that can help you maximize philanthropic giving in a tax efficient way. Charitable Remainder Trusts are structured to pay a beneficiary regular income payments for a specific term, and then a named public charity is gifted the remaining balance at the end of the term. A Charitable Lead Trust does just the opposite, paying a charity regular income payments for a term, with the remaining balance given to a named beneficiary at the end of the term. Both of these types of trusts are very powerful ways to make a significant charitable contribution while transferring assets out of your taxable estate.

5.     Gift Private Business Interests

Cash and securities are not the only assets available for gifting. If you own interests in a privately held business, you can consider donating a percentage of those business interests. The donor will avoid the long-term capital gains tax incurred by selling the assets and claim a charitable deduction based on the fair market value, ultimately reducing taxable income.

How an Independent Financial Advisory Firm Can Help.

Navigating the complex landscape of tax-efficient philanthropy requires specialized knowledge and expertise. An independent financial advisor can serve as a valuable partner in designing a philanthropic plan tailored to your unique circumstances. Here's how we can help:

Comprehensive Financial Assessment

An independent financial advisor will conduct a comprehensive assessment of your financial situation, taking into account your income, assets, and investment portfolio. By understanding your financial picture, they can identify tax optimization opportunities and align your philanthropic goals with your overall financial plan.

Charitable Giving Strategies

With in-depth knowledge of tax laws and regulations, an independent financial advisor can guide you through various charitable giving strategies. They will recommend the most tax-efficient ways to structure your donations, such as donating appreciated assets, utilizing donor-advised funds, or setting up a private foundation. By maximizing deductions and minimizing tax liabilities, you can ensure your philanthropic dollars have a more significant impact.

Legacy Planning

Philanthropy often plays a crucial role in legacy planning for high-net-worth individuals. An independent financial advisor can assist you in creating a philanthropic legacy that reflects your values and goals. They can help establish charitable trusts, create endowments, or explore other vehicles to ensure your charitable endeavors continue to make a difference even after your lifetime.

Collaboration and Network

Independent financial advisors often have a vast network of connections within the philanthropic community. They can introduce you to other philanthropists, nonprofits, or organizations aligned with your interests. Through collaborations and partnerships, you can amplify the impact of your giving and contribute to systemic change.

Tax-efficient philanthropy offers high-net-worth individuals an opportunity to make a meaningful difference while optimizing their tax situation. By partnering with a Capstone Financial Advisor, you can navigate the complexities of charitable giving, align your philanthropic goals with your financial plan, and leave a lasting legacy.

Embrace the power of tax-efficient philanthropy and embark on a journey to maximize your impact on the causes that matter most to you. Together, we can build a brighter and more equitable future for all.

Disclosures:

This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.