Planned Giving: A Quick Guide
Everyone dreams of doing well enough financially to not only support themselves and their children, but also to create a legacy through charitable donations.
Once you’ve built a significant net worth, you should consider planned giving. This concept combines doing good and doing well.
Planned giving seeks to maximize the impact of your contributions while minimizing your tax burden. You should seek formal advice from your tax advisors and investment professionals about how to structure your planned giving, and the amount you wish to donate.
With that caveat, here’s an overview of some of the possibilities:
Consider giving while you’re still working
Because your income tax rate is generally much higher when you’re working than when you are retired, consider the potential impact of giving while you’re working.
For example, if you’re 62 years old and making $300,000 per year, giving $100,000 per year to charity maximizes your tax deductions.
By making that gift while you are still working, you could reduce your tax burden by up to $45,000. If you prefer not to give that much to charity at one time, there’s an easy solution: Instead of giving directly, you can build up a pot to allocate to charities in the future.
This can be accomplished through a donor‐advised fund, which lets you give the money and receive the deduction in a particular year, but allocate the money to be distributed in future years. This strategy lets you donate not just cash but also stock, cryptocurrency and other financial assets.
Using debt to accomplish these objectives is an even more sophisticated approach. If your debt ratio is low, you could fund your charitable gifts through borrowing.
Depending on your tax bracket, placing $100,000 per year for three years into a donor‐advised fund could garner more than $130,000 in tax benefits and a charitable pot of $300,000 to allocate in the future.
This means that for a cost of $170,000, you could allocate $300,000 to charities. The benefit of building up this pot is that it may reduce the amount you need to take from your portfolio in the future.
Look into charitable gift annuities
Charitable gift annuities are a way to give money to a charity in return for their commitment to give you a fixed payment for the rest of your life. You get the tax deduction the year you set up the annuity, and the remainder value goes to the charity when you die.
This transfers the investment risk to the charitable organization, which enters into a contract guaranteeing it will continue to pay you, no matter how long you live. The better the charitable organization does with its investment returns, the more they get, so you may want to consider donating only to large organizations that have big endowments (deep pockets) and qualified professional staffs to minimize the risk of the organization running out of money and not fulfilling its obligation to pay you.
It is also a best practice to know the organization well, including its asset base and payment history record.
A deferred payment charitable gift annuity is structurally very similar to a charitable gift annuity, but you can make the contribution now and have the fixed payments start later.
Let’s look at an example of how this could be an effective tool:
Consider a 60‐year‐old couple who believe they are on track for retirement. At ages 60, 61, 62, 63, and 64, they give $100,000 per year to a series of deferred payment gift annuities.
At age 65 they have a significant taxable event from the sale of their business and give an additional $500,000, for a total of $1 million. They set each gift to start payment at age 90.
Depending on their tax bracket, they would receive a total tax savings of approximately $290,000, meaning that the gift in effect cost them $710,000.
At age 90, the couple would receive total payments of $215,000 per year until the longest surviving spouse dies. They have a safety net, and their remaining assets need to last them only until they’re 90.
Of course, the best part is that they can pass on $1 million to an organization that they care about.
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