Knowing What Counts Podcast

When Charity Meets Strategy: The Hidden Vehicles of Philanthropy

• Tim Provost, CPA • Episode 13

Share episode

Send us a text

Giving Smarter: Innovative Paths to Charitable Giving – Jason Warner Tax Senior Associate

Charitable giving transcends simple generosity when approached strategically. In this enlightening conversation with tax senior associate Jason Warner, we uncover powerful charitable vehicles that can transform your giving impact while optimizing tax benefits.

Many donors default to writing checks to their favorite organizations without realizing there are more sophisticated options available. Jason walks us through four key charitable strategies that high-net-worth individuals and business owners should consider. Donor-advised funds offer flexibility and immediate tax deductions while allowing contributions to grow tax-free before distribution. Charitable remainder trusts provide income streams to donors while ultimately benefiting chosen charities. Charitable lead trusts work in reverse, benefiting charities first before transferring remaining assets to heirs—an excellent tool for multi-generational wealth planning.

For those over 70½, Qualified Charitable Distributions from IRAs present a straightforward yet powerful giving approach, allowing up to $108,000 in annual charitable gifts while satisfying Required Minimum Distributions without increasing taxable income. Jason highlights the significant advantage of donating appreciated assets rather than cash—the most common mistake donors make—which provides a double tax benefit through full-value deductions and avoiding capital gains tax.

Whether you're a high-net-worth individual looking to maximize philanthropic impact or a business owner seeking to integrate charitable giving into your tax strategy, this episode delivers practical insights for strategic philanthropy. Remember, success begins with knowing what counts. Ready to optimize your charitable giving strategy? Call 413-739-1800 to connect with our expert team today.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Speaker 1:

Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with Knowing what Counts. Because success begins with knowing what counts.

Speaker 2:

Charitable giving isn't just about generosity. It's about strategy. Let's explore smart ways to maximize your impact while optimizing tax benefits. Welcome back everyone. I'm Sofia Yvette, co-host and producer here in the studio with Jason Warner, tax senior associate at MPCPAs. Jason, how's your day been so far?

Speaker 3:

It's going well. How are you?

Speaker 2:

Doing well also, Jason. So can you introduce yourself to the audience and tell them more about your role at the firm?

Speaker 3:

Yes, so, as you mentioned, my name is Jason Warren. I've been with the firm for just under six years. I'm a senior tax associate and in my role, I work closely with a diverse portfolio of clients, ranging from individuals and small businesses to large corporations, whether it's reviewing their returns or offering strategic advice on minimizing tax liabilities.

Speaker 2:

So, jason, many people are charitably inclined just to write a check to their favorite charity. What are some of the lesser known charitable vehicles that people may not be aware of?

Speaker 3:

Yeah, so I mean writing a check is certainly the easiest and the most straightforward, but there are actually several lesser known charitable vehicles that can be more strategic, both for the donor and the charity. The first is the donor advised fund, which we spoke about a previous podcast. When you contribute stock or appreciated assets, you can take an immediate tax deduction and you can recommend grants to charities over the years. The second is going to be a charitable remainder trust, and there are actually two types of charitable remainder trusts. The first one is going to be a CRAT or a charitable remainder annuity trust. In the CRAT, the donor transfers assets into an irrevocable trust that they set up and the trust pays the donor or the non-charitable beneficiary a fixed annual income at least 5% of the initial value of the contribution for up to 20 years or the lifetime of the beneficiary. The remainder then goes to one or more of the charitable organizations. You would get a charitable deduction in the year that you fund the trust and, based on the projected value of the remainder, would go to the charity. There are no additional contributions after you make the initial one. The second would be the CRUT. The CRUT is similar to the CRAT. The CRUT stands for Charitable Remainder Unit Trust. The difference is how they pay the income and how they handle the trust assets. So in a CRUT the annual payout is based on a fixed percentage of the value versus a fixed annual payout, and this is based on the trust assets, and the assets would then get revalued each year. The difference is there are no additional contributions are allowed, so there is a little bit more flexibility.

Speaker 3:

The third are the charitable lead trusts. There's two types of lead trusts as well the charitable lead annuity trust, also known as a CLAT. This would be the donor transfers assets into an irrevocable trust and the trust pays a fixed annual amount at least 5% of the value to one or more charities for a set number of years or for someone's life. The payment stays the same each year and the remainder goes to the heirs. The other type of charitable lead trust is a CLUT. That stands for charitable lead unit trust. Similar to the CLAT, the donor transfers assets into an irrevocable trust and they pay a fixed percentage amount versus a fixed annual amount to one or more charities for a set number of years. The payment changes each year and the remainder goes to the heirs. So the gift tax is calculated upfront based on the present value of the remainder. Trust is calculated upfront based on the present value of the remainder trust, and if the trust assets outperform the hurdle rate, the excess growth passes to heirs without any additional tax.

Speaker 3:

Both charitable lead trusts can be structured as grantor or non-grantor trust, and if a grantor trust, then, oh sorry, am I able to? When we restart, do we have to restart the whole thing? No, so the fourth vehicle I'm going to discuss is a qualified charitable distribution. This one's a little bit more straightforward. It's a direct transfer of your funds from your individual retirement account that's payable directly to a qualified charity. This allows IRA owners that are age 70 and a half or older to donate up to $108,000 per year directly to a charity, and they can exclude that amount from their taxable income, and this will satisfy RMD requirements without increasing any taxable income.

Speaker 2:

So, jason, what's the difference between giving cash and appreciated assets like stocks or real estate?

Speaker 3:

So giving cash is very simple and straightforward. You just write a check or give cash to the qualified charitable organization and you can deduct that amount up to 80% of your AGI in that year. This is ideal for recurring, smaller donations. Giving appreciative assets, such as stocks or real estate, is a little more complex but beneficial. If you have assets that have appreciated over the years and you donate them, you can get a deduction for the full fair market value, and this would be ideal for larger, one-time donations.

Speaker 2:

What's the difference between charitable remainder trusts and charitable lead trusts?

Speaker 3:

I'd say the simplest way to think of the difference is they operate in opposite directions. With the charitable remainder trust, the charity receives the remainder after the individuals are paid. But with the charitable lead trust, the charity receives the payments first and then the heirs receive the remainder.

Speaker 2:

Who is the ideal candidate for setting up a charitable remainder trust or a charitable lead trust?

Speaker 3:

So the charitable remainder trusts are best for individuals who want to generate income from appreciated assets without triggering any immediate capital gains tax and who are looking for an immediate tax deduction to charity lead. The charitable lead trusts are best for individuals who want to support a charity now with annual payments and do not need the income from assets during the trust term. This is typically for high net worth individuals engaged in multi-generational wealth planning.

Speaker 2:

What's the biggest mistake people make when giving to charity from a tax perspective?

Speaker 3:

The biggest mistake that we would see is giving cash when appreciated assets would be better. So you miss out on avoiding capital gains tax and you may get a smaller deduction if you just give cash or you sell the stock and then give that cash. Donating appreciated assets can provide you with a double tax benefit, so you would be able to deduct the full value and you'd be able to avoid capital gains.

Speaker 2:

How can small business owners integrate charitable giving into their tax strategy?

Speaker 3:

So there's multiple types of businesses. You have C corporations, which can deduct charitable contributions up to 10% of their taxable income. You have S corporations or partnerships, who will pass the deduction through to the owners and they can claim it on their personal returns. Businesses can also donate inventory or services or they could transfer a portion of their business interest into a CREP before the sale, and that will help defer or eliminate capital gains tax.

Speaker 2:

What steps should someone take if they are interested in setting up one of these types of charitable vehicles?

Speaker 3:

Well, first I would identify what your charitable goals are, such as what causes you care about, and if you want to give now, wait or you can give it both. Second, I would consult with a financial advisor or a tax professional to further understand the implications and requirements, to ensure you are choosing the right vehicle. And then, third, I'd work with an attorney to draft up the legal documents, and you could set up the trust by doing that.

Speaker 2:

Well, Jason, thank you so much for sharing those helpful insights with us today. We'll catch you later. Have a fantastic rest of your day.

Speaker 3:

You as well, thank you.

Speaker 1:

Thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit thempgroupcpacom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.