Tax-Efficient Charitable Giving Strategies

Tax-Efficient Charitable Giving Strategies | Retire Early & Maximize Returns

In this Christmas Eve episode of the Retire Early Return Out Podcast, hosted by Hunter Kelly of Palm Valley Wealth Management, explore four tax-efficient ways to donate to your favorite charities. Learn about donor-advised funds, qualified charitable distributions (QCDs), donating appreciated assets, and charitable trusts. Discover how these strategies can help you meet your financial goals and maximize your tax deductions. Hunter also invites listeners to share their favorite charities on YouTube. Note: This podcast is for educational purposes only and not a substitute for professional advice.

00:00 Welcome to the Retire Early Podcast

00:06 Introduction to Tax-Efficient Giving

01:13 Donor Advised Funds Explained

04:35 Qualified Charitable Distributions (QCDs)

07:40 Gifting Appreciated Assets

08:47 Understanding Charitable Trusts

15:34 Conclusion and Holiday Wishes

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Transcript

0:00

And welcome to the retire early return out podcast. I'm your host hunter Kelly owner, Palm valley wealth management. And today we're going to talk about four tax efficient ways for generous givers, uh, to give to their favorite charities. Right. And I thought no better way since this episode is, uh, releasing on Christmas Eve. Uh, no better way to. Uh, do this episode then to talk about. Uh, giving and doing it in a tax efficient manner because that's all. We're about here is how do we save on taxes? How do we meet our financial goals through investing savings? And all of those different things. So. Uh, this is just another way to go about it. And, uh, tos. TIS the season for giving and that's what we're going to talk about today. So if you liked this podcast, go ahead and leave a five-star review on your favorite podcast and out. And as a reminder, we're on YouTube now. So go to hunter, Kelly CFP. Uh, subscribe to that channel and leave a comment on what your favorite charity is. I'd love to. To know, uh, what charities you give to and why and why it's special to you. I have a few myself. Uh, but we'd love to hear from you guys. So. Let's just jump right into it. Uh, the first way to give tax efficiently is through what's called a donor advise fund. So what does a donor advise fund is a charitable investment account where. You can donate and distribute funds to your charities over time. And you're asking yourself, well, what's different than just giving to my charities directly versus using this donor advice on. Well, what the donor advise fund will do is give you a full, uh, deduction, uh, for that. Initial contribution to this account. Uh, if you itemize in that given year. So if, you know, for sure, there's a particular charity that you give, let's say$50,000 a year to, and you know, you're going to do that for at least another 10 years, and you have maybe appreciated stock or a lots of cash on hand. Things of that nature. You can go ahead and dump, let's call it$500,000 into this account and you can take a large reduction of income. Up front. Um, Instead of having to wait to do that each year. So this can help you itemize again, because of the tax law changes back in 2017, it makes it much more difficult to, uh, itemize. Most people take the standard deduction. Well, this is one way you can bunch your charitable contributions to potentially itemize every other year. And we talked about a little bit last episode. Using this strategy to do Roth conversions, things of that nature. Um, and so, uh, if you're donating things like a stock where you have a much appreciated stock, then you can avoid capital gains, things of that nature. And so a donor advised fund is one of the more popular ways to donate. Um, and take some tax deductions. So how do we go about doing. Or opening a donor advised fund. So you got to ask yourself a few questions first, right? Um, so what cause do I want to support. How much do I want to contribute initially? Um, and then. Uh, what type of investments do I want for this fund over time? How do I want it to grow? How often will I give to the particular chair? To the particular charity, excuse me. Um, and do I want, uh, my family to be involved? And so, uh, once you ask these questions, you can go and research. Uh, different donor advised, uh, providers. Um, and so fidelity, Schwab, Vanguard, um, lots of others, but those are the kinds of the big, main three. And you can, uh, there's another one called Daffy. That's fairly new. Uh, that you can use as well. And so all of these will help facilitate in one. Doing the proper tax paperwork to help you get those deductions, but to a will. Um, Go ahead and help you search fine. And then they will send that money directly to the charity of your choice. Um, if it's a one on one of their, a list of charities as well. And so, um, the biggest thing here is one. How do you want to treat those investments once you get inside of that account? Uh, do you want it more for short-term giving long-term giving? And now we'll help you decide how do I want to invest this type of money? And then making sure that, uh, At the end of the day that you're giving to the proper, um, charity, as you would wish. Right. And so the next thing, uh, Well, you can look at doing for charitable giving that can help with taxes is what's called a qualified charitable distribution. What does it qualified? Charitable distribution is also known as a QCD. And so these are replacing what's called your RMD. So, uh, instead of taking your choir, Their required minimum distribution out of your IRA. When you turn 75, you can actually direct these distributions. To a charity of your choice. And so, uh, from there you can, uh, take that deduction. Now. You're not having to take that income. So, uh, how has this helped from a tax standpoint? So. Counts toward your RMD. So if you need to take a$50,000 RMD, but instead you choose to give that to a charity of your choice, obviously doing the correct paperwork and things of that nature, then you can avoid having to take that RMD as far as, uh, Those taxes and things of that nature. And then you're contributing to that charity as well. And so. A couple of things to kind of think about here. Um, If you're a lower income earner on paper in retirement, this can help you preserve. Uh, credits and things of that nature for Medicare part B premiums, um, social security benefits, things of that nature. Um, so these can really help long-term for a certain credits. Um, and so. Let's say, uh, your, um, at the RMD age and you need to take. A hundred thousand dollar RMD. Well, if you don't need that a hundred thousand dollars that could easily push you up to make your social security taxable. Uh, bumped you have a Medicare bracket where you're paying. More S uh, Medicare surcharge premiums, things of that nature. And so. QCD is being able to give to your charity instead of taking that minimum distribution and paying taxes on that. Can, uh, help you from a tax standpoint, if you're already charitably inclined, obviously, uh, you don't want to just give your money away to give your money away, but if you're already giving to your church or some sort of foundation, things of that nature, uh, this can be a good way to keep your taxes. Um, Either even, or reduced, right. Um, it's another way for lower income. Um, retirees to maximize their standard deduction. As I said previously, a lot of people do not, or most people do not itemize, right? Because the standard deduction is much higher. Uh, as of 2017. So, uh, this is a way to kind of, uh, do your. Uh, itemized deduction in a way, uh, versus. Having to lump contributions together, things of that nature. So, um, so QCD is, can be very effective in keeping your income the same or lowering your income. Um, and so give that a thought, if you're in that. Uh, 70 to 75. Range, because you're going to have to start thinking about a required minimum distributions. The next thing. Uh, if you are one of those lucky people that got into a stock early, and it has appreciated quite a bit, let's say you have a million dollars of apple. Uh, that you bought for$200,000 or something of that nature. Um, you can actually give a appreciated assets to your, your charities of choice. Um, you can avoid those capital gains. Of the appreciated stock. Um, and then receive a full fair market value. Uh, deduction. So. How would this work? Right? And so, um, if you're a high income earner, this is good way to, or high net worth. So if you're, you're bumping up against the. Uh, estate tax thresholds of, uh, potentially only owing a state tax. Uh, at your passing things of that nature. Uh, this is a good way to kind of get those types of assets out of your estate and maybe lower it to the point where now your family and your state does not need to pay those estate taxes. So that's a good way to contribute to your charity, but also avoid a capital gains tax as well. Uh, the next thing. Uh, his charitable trusts. So, uh, you could use a charitable remainder trust or a charitable lead trust. Um, again, uh, we're preface this conversation, this part of the podcast episode with I'm not an attorney. Uh, don't take this as legal advice. These are just ideas. Uh, if it seems like it would pertain to you go ahead and consult with an attorney, they can write up these trusts and things of that nature. Um, and, uh, and. If it's appropriate for you, they would recommend that I'm not a licensed attorney, but these are just ideas and things that I've seen clients do over my, my career. So what is a charitable trust? So a charitable trust is usually structured by an attorney and allows you to support your charities. While still re retaining income from those assets. So, uh, what are the tax benefits? Will you get a partial deduction now while creating a future charitable legacy? And we'll talk about what that means here in just a second. And then, uh, you have potential to minimize your state taxes, kind of like we talked about in the last, uh, strategy of. The appreciating assets. So. So let's walk through an example of what a charitable remaining trust would look like. Right. So first, first step will be obviously work with an attorney to get this established and make sure it's the right. Type of trust you would need or strategy that you need for your situation. Um, and then they would choose or help you choose either a charitable remainder trust or a charitable remainder annuity trust, whatever makes sense for you. Um, so a CRUT would be. Matt charitable remainder unitrust and that would pay out a percentage of what the trust value is. Each year, and then you would recalculate what annual income you would get based on that. So you put a million dollars in there. Um, that first year you may get 5% of that. So you may get$50,000. But if that, uh, would grow to let's say$60,000 the following year or. Uh, sorry,$1.2 million the following year, maybe you get 60,000, right? And so whatever that math works out to be. Uh, there were a charitable remainder, uh, there. Yes, the charitable remainder annuity trust, uh, are generally fixed payouts. Um, maybe over a certain time period over your lifetime, whatever. Uh, however the trust is, um, spelt out and in the directions there. Um, and then you would get some sort of fixed payout. So$50,000 a year, a hundred thousand dollars a year, whatever that may be. Right. Um, and so. You would designate beneficiaries for that income, whether that be yourself, a spouse, family members, whatever that case may be. And then the charity would receive the remainder of what's left in that trust at that time. And so, um, once the attorney writes all of that up, You would fund that, uh, that trust with, uh, potentially appreciated assets. Real estate stocks, bonds, mutual funds, whatever that may be. And then you would avoid potentially any capital gains. Maybe you have to sell some of those stocks to get into a particular portfolio. To meet the need of the income stream that you need. Uh, you would avoid those capital gains and then obviously receive that income. Uh, as well, the trust, uh, can sell these assets. Tax-free. Maximizing the amount available, uh, for you to. Uh, for investments and then income generation. The next step would be to generate your retirement income stream. So using this trust, um, as income stream, in terms of, do you want a percentage of the value or do you want to fix them out and. Um, depending on your situation, you would consult with the attorney, um, to figure out which one would make most sense and obviously meeting with your advisor. As well. Um, payments are typically based on, uh, Based on the nature of the trusts earning. Um, Ordinary income, capital gains, return of principle, things of that nature. And so. Last up is, um, the benefits of their charity receiving what's leftover in there. Right? So, uh, some tax benefits that you would get, uh, you get a charitable deduction up front. So when you fund, uh, that charitable remainder trust, you receive a partial tax deduction based off the present value of the, uh, charitable remainder that's in there. And then, um, that would be calculated by IRS tables. And then you would avoid capital gains if there was any appreciated stocks or things of that nature in there as the, it goes to the cell to meet the income need that you would generate from this trust. And then, uh, from an estate planning. Perspective. You would eliminate some of those assets and there. Uh, from your state. So again, if you're, if you're one of those people that, uh, are worried about paying the estate tax, Um, after your death, then this would remove that from, uh, your estate. And now maybe that would put you under the threshold, whatever your situation may call for it. Right. Um, and then after. The, the term of that income. Uh, whether that be your death or a fixed, uh, term of, let's say, 20 years, anything left in that trust will be going to the charity. Um, so here's a quick scenario or example. So John 65. Uh, plaintiff to retire soon, he owns a million dollars or appreciated stock with a cost basis of 200,000. If he's sold, uh, the gains obviously would be fairly significant. He would have to pay capital gains taxes on$800,000. So instead John, uh, meets with his attorney. Uh, the attorney writes up the CRUT. They fun with that million dollar stock. Uh, they sell the stock to meet the investment that they need to produce the annual income. Um, so he avoids capital gains. He receives annual income of 5% in the first year. So$50,000. And if that, uh, fun grows, if he, uh, increases the value of that, he would increase his payments. Right. It would do that at calculation every year. Uh, you would get a tax deduction. He receives an immediate partial, uh, charitable deduction. Reducing his taxable income for that year. So maybe he can do some Roth conversions on different accounts that he may have already things of that nature. So that all kind of plays in there. And then he'll support a charity. Um, at his passing that he, he wants to give to. So lots of different information here. Um, bunch of different ways that you can give charitably and reduce your taxes. Uh, again, I thought this would be a good topic, uh, as we are in the giving season. Uh, it is Christmas Eve. So for those that celebrate Merry Christmas and Hanukkah starts. Uh, tomorrow as well. So happy Hanukkah for those. Uh, that celebrate the Jewish holiday. Um, but if you liked this podcast, go ahead and share it with a friend, leave a five-star review and, uh, get on YouTube and tell me what your favorite charity is, would love to hear about it. Um, and we'll see you next week. This podcast is for educational purposes only is not meant to be legal advice. Financial advice. Uh, please do not make decisions solely based off of this podcast. Please meet. With legal, financial tax or insurance professionals about your particular situation. Keep please. please. keep Palm valley wealth management in mind when making those considerations.