This recently publicized effort to increase philanthropy from the wealthy comes during a time when charitable giving is suffering its sharpest decline since the statistic started to be recorded in the 1950s. It’s yet another sign that the recession is affecting not only how we spend but also how we give, and our own local religious and charitable organizations are sure to be feeling the pinch, too.
At a time when people are really watching their pocketbooks, charitable giving might not be as much of a drain on your resources as you might think. Giving can come with some valuable tax deductions — especially if done with planning and foresight. The following are some general rules of thumb when incorporating philanthropy into your tax, retirement and estate plans:
n Gifts made while you are living are generally more valuable than bequests. That is because gifts during your lifetime can result in sizable income tax deductions. For instance, say you gave $100 to your favorite charity and were in a combined 40 percent income tax bracket. When taking
into consideration the tax savings for the charitable deduction, the “cost” of your gift is only $60. Had you instead bequeathed the $100, it would have cost your estate the full amount of the gift.
n Appreciated assets make better gifts than cash. There is a double tax advantage here. Capital gains taxes can be saved on the sale of the asset, and you can still get a deduction for the full fair-market value of the gift. Let’s say you had a stock with a cost basis of $5 trading for $20 per share. You could donate the stock, get a charitable deduction for the full $20 per share and avoid any long-term capital gains taxes on the sale of the stock.
n At death, donate tax-deferred assets, such as retirement accounts and tax-deferred annuities, rather than real estate or life insurance. That’s because your non-charitable beneficiaries (such as your children) have to pay income taxes on any distributions from tax-deferred accounts, while charitable organizations don’t. Conversely, your heirs wouldn’t pay these same income taxes from the proceeds of a life insurance policy or sale of real estate. That strategy alone can help you and your heirs save thousands in unnecessary income taxes.
n During life, donate to a charitable trust to retain control of the asset and continue to generate an income stream. This strategy still offers a nice income tax deduction now, but it can also provide you with ongoing retirement income. At your death, any remaining assets will pass to your designated charity. Perhaps the best aspect of this strategy is that beneficiary designations are revocable. You can change which charity gets the eventual proceeds at any time, ensuring that you donate to your cause du jour.
Please keep in mind that there are some limitations and restrictions that are beyond the scope of this column, so you should consult with your own advisers before signing your own Giving Pledge. To be sure, those on Buffet’s and the Gates’ lists are consulting with their advisers to structure their newly pledged charitable giving in a way to take full economic advantage of what is available to them and their families in the tax code. You should, too.
• Orion Melehan is a certified financial planner for LMC Financial Services in Scotts Valley. Contact him at 454-8042 or email@example.com.
Securities and investment advisory services offered through SagePoint Financial Inc. member FINRA/SIPC a registered investment advisor. LMC Financial Services is not affiliated with SagePoint Financial Inc. or registered as a broker/dealer.