Texas Wealth Advisors Weigh In on Year-End Charitable Planning

Are all financial donations tax-deductible? Is there a better way to give to a charity? What is a charitable trust? These are all good questions – and popular concerns. As one of the Texas Wealth Advisors at Linscomb & Williams, I get asked about charitable giving often. Below is some information that can help.

Charitable giving can be an excellent win-win for individuals and their favorite charitable organizations. Not only are you supporting a good cause and helping a benevolent organization fulfill its mission, but you are also giving yourself an opportunity to obtain solid tax benefits and retain more of your family’s wealth.

With 2020 more than halfway over, your end-of-year financial activities are right around the corner, and you still have time to plan and donate to your favorite charity while obtaining the benefits.

Similar to the power of financial planning, charitable planning can significantly boost your future finances. With proper charitable planning, you can maximize your giving, preserve your long-term wealth and cement a legacy for your family.

What is Charitable Planning?

Charitable planning is the strategy and planning behind your efforts to support your favorite charities that help you minimize taxes and preserve your family assets. If you want to go beyond the standard deduction, charitable planning is integral to your tax return-filing.

In a broader sense, good charitable planning can include additional actions to make sure that your wealth can transfer to future generations efficiently. Estate taxes, capital gains taxes, and ordinary income taxes can each dilute what you’re actually able to leave behind when you’re gone. Charitable giving is an effective way to tackle this problem.

Once you verify that your charity is a tax-exempt 501(c)(3) organization, there are a number of useful ways to lower your tax burden. These strategies often involve using your retirement accounts effectively, and donating assets that have grown in value.


Are you getting the most out of your charitable donations? Schedule a conversation with Linscomb & Williams.


Advantages of QCDs and Gifts of Appreciated Property

If you own a retirement account that is considered pre-tax (which can include your traditional IRA, 401(k), 403(b) and the like), you are required to make annual withdrawals once you reach the age of 72. These mandatory withdrawals, called Required Minimum Distributions (RMDs), vary based on your account balance and are taxed as ordinary income. But charitable donations made with these monies can receive special consideration.

If you have other liquid assets outside of your pre-tax retirement account that can cover your monthly spending, talk to a financial advisor about donating all or a portion of your RMD to a qualified charity to complete a Qualified Charitable Donation (QCD). By completing a QCD, the amount donated to your charity is excluded from your income up to $100,000, keeping your taxable income lower than if you moved the money into one of your personal accounts.

It is important to note that based on recent legislation, you can actually begin QCDs from your IRA or other tax-deferred retirement account as early as age 70-½, even though the normal age for RMDs has been increased to age 72. However, if you are continuing to make IRA or 401(k) contributions, you probably should not be making QCDs in the same tax years. 

As mentioned earlier, any money withdrawn from a pre-tax retirement account is typically taxed as if it’s extra income, but QCDs are not. What’s more, the credit union, bank or brokerage firm that houses your retirement account can easily set up a QCD at your request. Depending on the amount of your RMD, redirecting the funds to charity can garner a substantial savings at tax time.

If you don't have or don't care to use retirement account assets, there are also tax-efficient strategies for charitable giving outside of your IRA. For example, gifting assets that have appreciated. A client of mine decided a couple of weeks ago to fund his charitable gifts for 2020 by donating shares of Microsoft (MSFT). He has 160 shares bought in 2011 for $4,000. The market value of those shares today is $36,000. When donated in 2020, he will still be able to claim his itemized deduction for $36,000 (saving him roughly $10,000 in income tax), but he'll get the additional benefit of avoiding altogether the capital gains tax that would otherwise be owed on the appreciation of $32,000. In this case, this added benefit is worth an additional $5,000 in income tax savings.

Stocks, bonds, mutual funds and many other assets are eligible to be donated to charity. Gifting these assets instead of selling them and using the money for charitable gifts can be a great way to potentially avoid the capital gains taxes you would incur by selling them. 

A further benefit of charitable giving is to potentially reduce future estate tax owed if property is passing to your heirs. An effective way to donate your assets that have grown in value is to utilize a charitable trust.

Charitable Trusts

A charitable trust has special parameters that determine what happens to the assets after a predetermined number of years. There are two basic types of charitable trusts: Charitable Remainder Trusts and Charitable Lead Trusts.

Charitable Remainder Trust

A Charitable Remainder Trust (CRT) is an irrevocable trust that aims to generate income for the donor (or other family beneficiaries) for life or a set number of years, with the remainder of the donated assets going to your chosen charity after the trust ends.

With these accounts, you can receive income from your investments for a number of years, then the assets will eventually be retained by the charity; thereby, removing the asset from your tax picture. Since the assets are no longer in your ownership, capital gains taxes and estate taxes are not a problem. Properly structured, a CRT will yield a substantial income tax deduction in the year during which it is initially created. If your CRT is funded with cash assets, you can make a charitable deduction up to 60 percent of your Adjusted Gross Income; if appreciated assets are used to fund the trust, up to 30 percent can be deducted in the current tax year.

Charitable Lead Trust

A Charitable Lead Trust (CLT) is also an irrevocable trust, but this setup provides immediate support to your charity through predetermined fixed payments for a specific period of time.

At the end of the term, the trust will revert to the benefit of you or your loved ones by transferring all of its remaining assets to them. As opposed to CRTs, CLTs generate income for your charity, but the property in the trust is ultimately retained by your family. The tax benefits are usually realized in years when donations are made and may be a good fit for a person with an unexpected spike in their annual income.

How Charitable Giving Relates to the Last Quarter of the Year

The end of the year is an important time for your charitable giving. As your financial picture becomes clearer, you will have a better idea of your overall income during the year’s latter months. This is your chance to maximize your tax savings as it pertains to your retirement accounts, and your charitable giving, especially.

For example, a great way to ensure you aren’t blindsided by your tax bill is to begin your charitable planning early during the fourth quarter of the year. Between October and November, you’ll likely have an idea of your income for the year, so you can plan ahead just before December to complete your giving strategically, and decide between making a QCD, giving appreciated property to charity, or establishing a charitable trust or possibly combining any of these potential charitable planning strategies.

You’ve worked hard to accumulate your wealth, so it’s important that the fruits of your labor aren’t needlessly lost to taxes. The savings you can achieve from your charitable planning can be used for further saving, investing, and even more charitable giving in the future.

If you’re not sure where to start, contact the Texas Wealth Advisors at Linscomb & Williams.

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B. Craig Ivy, CFP®

B. Craig Ivy, CFP®

B. Craig Ivy is a Director and Wealth Advisor for Linscomb & Williams.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.