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The chagim are upon us, which means many organizations will be reaching out to solicit donations before year-end. Many individuals choose the straightforward approach of writing a check to the charity of their choice. It is simple and beneficial from a tax perspective. However, there are myriad of creative ways to give charity that may help the donor achieve other personal financial planning objectives while benefiting the organizations about which they feel passionate. While these strategies are more involved than writing a check, they may be worth considering depending on an individual’s financial, tax, and estate planning situation. Below are some approaches to consider.

  1. Make Qualified Charitable Distributions (QCDs) from your IRA: Investors who are at least 70½ can donate up to $100,000 from their IRA annually as a QCD. The distribution is made from pre-tax dollars and can be used to satisfy your annual Required Minimum Distribution (RMD). Typically, one would need to pay ordinary income tax on RMDs. This strategy is a wonderful way to sidestep this tax liability while benefiting the charity of your choice.
  2. Donate appreciated stocks: While investors have experienced a big decline in portfolio values this year due to the market drop, many folks still have long held, concentrated stock positions with large imbedded unrealized capital gains. This may be through gifts, accumulating shares from working at a company for many years, or the appreciation over decades of a long-held position. Donating these highly appreciated securities directly to charity helps avoid paying capital gains tax that you would otherwise need to pay when selling the security. It also allows you to minimize a large position, which helps de-risk your portfolio.
  3. Donate cash proceeds from the sale of stocks that are at a loss: This is particularly relevant in a year like 2022 when stocks across the board have plummeted in value. In this “tax-loss harvesting” strategy, investors benefit from recognizing a loss by selling a stock that went down in value. The loss can be used to offset any capital gains for the year or be used to offset up to $3,000 of your ordinary income. That is in addition to the charitable deduction you receive for your cash donation from the proceeds of this sale.
  4. Utilize a Donor-Advised Fund (DAF): A DAF is an account where you can deposit assets for donation to charity over time. The donor gets an immediate tax deduction when making the contribution to the DAF and can still control how the funds are invested and distributed to charity. It is extremely simple to set up and manage on an ongoing basis. I personally have used the Jewish Communal Fund (JCF) as my DAF in past years, but there is a plethora of options available to investors.

A DAF may be particularly useful when “bunching” your charitable contributions. “Bunching” involves donating several years’ worth of charitable contributions all at once, which is sometimes done for tax planning purposes. Contributions to the DAF will be deductible in the year of the gift but grants from the DAF to charities can be made at any time. As an example, consider someone who contributes $10,000 to charity each year. Charitable contributions are only tax deductible to those who itemize their deductions. In 2022, the standard deduction is $12,950 for single filers and $25,900 for joint filers. To help itemized deductions exceed the standard deduction amount, this person may consider “bunching” two years’ worth of charitable donations. In other words, they would make a $20,000 DAF contribution this year and skip a donation next year. This allows them to take the itemized deduction in the current year and still distribute the funds as they wish over current and subsequent years.

  1. Set up a Private Foundation: A private foundation is an independent legal entity set up for charitable purposes. Unlike a public charity, which relies on public fundraising to support its activities, the funding for a private foundation typically comes from a single individual, family, or corporation, which receives a tax deduction for donations.
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Starting a private foundation is one way to create a legacy beyond your lifetime. It also allows family members to be employed or serve as members of the board. Additionally, the family has full control over grant-making, which includes an ability to support organizations other than 501(c)(3) public charities, which may not be the case with a DAF.

One downside of starting a private foundation is the work and cost associated with establishing and maintaining it. It requires the assistance of advisors, including a CPA and lawyer, which makes it more cumbersome and involved than simply using a DAF. However, for the right set of circumstances and level of wealth a private foundation is worth considering.

  1. Charitable Trusts: With charitable trusts, a person leaves all or a portion of their estate to charity when they die, serving both philanthropic and certain tax planning goals. Charitable trusts may be set up inter vivos, meaning during a donor’s life, or testamentary as part of a trust or will at death. There are two basic types of charitable trusts: charitable remainder trusts (CRT) and charitable lead trusts (CLT).

A donor establishes a CRT to provide an income stream to a beneficiary and designates a public charity or private foundation to receive the trust’s remainder value once it terminates. CLTs are somewhat of the opposite. They first make payments to charity, either a fixed amount or a percentage of principal, for the term of the trust. At the end of the trust term, the remainder value can either go back to the donor or to heirs named by the donor.

These trusts are a wonderful way to benefit charity and achieve a family’s retirement and estate planning goals in a tax advantaged manner. It’s important to engage with an experienced estate planning attorney to determine proper usage and to get it set up correctly.

  1. Charitable Gift Annuity: A charitable gift annuity is a contract between a donor and a charity. In exchange for a sizable gift to the organization using cash, stocks, or possibly other assets, the donor receives a partial tax deduction for the gift plus a fixed stream of income from the charity for the rest of their life. Many large nonprofit organizations, including universities, offer charitable gift annuities. This is a wonderful way to receive a stream of income in retirement, gain a tax benefit, and support an organization about which you are passionate. It’s a win-win-win situation.

Since many of these strategies are a bit out of the box, it’s important to consult your team of tax, legal, and financial advisors to determine an approach that is most sensible for you. Doing so will position you to have the biggest impact with your philanthropic dollars this year.

Readers are encouraged to ask their personal financial questions, which may be quoted from and addressed in a future column, by emailing Jonathan@shenkmanwealth.com.

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Jonathan I. Shenkman, AIF® is the President of Shenkman Wealth Management and serves as a financial advisor and portfolio manager for his clients. In this role he acts in a fiduciary capacity to help his clients achieve their financial goals. He publishes regularly in financial periodicals such as Barron’s, CNBC, Forbes, Kiplinger, and The Wall Street Journal. He also hosts numerous webinars on various wealth management topics. Jonathan lives in West Hempstead with his family. You can follow Jonathan on Twitter/YouTube @ShenkmanOnMoney.
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