In my last article, I shared a few charitable giving strategies that can help you be your generous self while at the same time being tax smart. In part four of this four-part series, I continue that theme and offer some final thoughts on tax-efficient giving.
Qualified Charitable Distributions
A Qualified Charitable Distributions (QCD) allows IRA owners above age 70 ½ to transfer up to $100,000 directly to charity each year. One of the benefits of donating via a QCD is that you can give to your favorite charity while potentially reducing your taxable income.
In addition, a QCD can satisfy all or part of your required minimum distribution (RMD) once you reach RMD age. This benefit makes it an especially tax-efficient giving strategy for people who have other income sources and don’t necessarily need their RMD.
Keep in mind that you must satisfy a few key rules for a QCD to be a non-taxable distribution.
Most importantly, the IRS considers the first dollars out of an IRA to be your RMD until you meet your annual requirement. To get the full tax benefit of a QCD, be sure to donate the funds directly from your IRA to charity before making any other withdrawals from your account.
In addition, your IRA custodian will require you to complete and sign a form that details your QCD intention. Then, the custodian will send a check to the charity of your choice.
In some cases, your custodian may allow you to write checks against your IRA. Just be aware that your checks must clear before year-end, so it pays to plan ahead.
Charitable Gift Annuities
A Charitable Gift Annuity is a tax-efficient giving strategy where an individual makes an irrevocable transfer of money or property to a charity. In return, the charity pays the individual a fixed income for the rest of their life or a specific term. The fixed payment amount is based on several factors, including the donor’s age, the donation amount, and current interest rates.
In addition, the donor receives a tax deduction for the initial donation and potential tax-free income from the annuity payments. When the donor dies, the charity retains the remaining assets for its mission.
Here are some things to keep in mind when donating to a Charitable Gift Annuity:
- The gift is irrevocable.
- Annuity payments are fixed and don’t adjust for inflation.
- The annuity payments may be lower than a comparable annuity that is not charitable.
Charitable Remainder Trusts (CRTs)
A Charitable Remainder Trust (CRT) is a “split interest” giving vehicle that allow donors to contribute assets to a trust and receive a partial tax deduction. The trust’s assets are then divided between a non-charitable beneficiary (who receives a potential income stream for a term of years or life) and one or more charitable beneficiaries (who receive the remainder of the assets).
There are two types of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). Each has its own distribution method.
CRTs have several benefits, including the preservation of highly appreciated assets, income tax deductions, and tax exemption on the trust’s investment income. In addition, you can donate a variety of assets to a CRT, including cash, securities, closely held stock, real estate, and other complex assets.
CRTs can also be established by will to provide for heirs with the remainder going to charities of the donor’s choosing.
Final Thoughts on Tax-Efficient Giving Strategies
Qualified Charitable Distributions, Charitable Gift Annuities, and Charitable Remainder Trusts are all potentially tax-efficient giving strategies that can help you achieve your philanthropic goals. Yet they are also complex and may not be right for everyone.
If you’re considering one of these strategies or are looking for more tax-smart giving ideas, be sure to consult an attorney, tax expert, and/or financial planner to determine which strategies make sense for you. In the meantime, please visit our Resources page for more information on this and other financial planning topics.
