But for your charitably inclined clients, there are a wealth of advisory options
by Herbert K. Daroff, J.D., CFP, AEPMr. Daroff is a contributing editor to this magazine, and is affiliated with Baystate Financial Planning, in Wellesley, MA. Connect with him by e-mail: email@example.com
With lower income tax brackets, higher standard deduction, and larger Federal estate tax exemptions, will charitable giving suffer? Keep in mind, that in some states, we still have state estate taxes. And, keep in mind that retirement accounts are still taxable as ordinary income whenever they are distributed.
Regardless of the tax motivations, you would still have more for yourself or your family if you didn’t give the money or asset to charity. Take a Massachusetts estate of $1,100,000 for a single person. The MA estate tax is $38,800. Remember, that’s not a 38.8% tax on $100,000. It’s about a 3.5% tax on the full $1,100,000. Massachusetts has a $1M filing exemption, not a $1M estate tax exemption. If your estate is over $1M, then you pay estate tax on the full value of the estate assets.
Assuming that the last $100,000 is IRA, the $38,800 would likely be taken from the other $1M of assets.
Therefore, the heirs, whenever they took the IRA, would pay income taxes on the full $100,000, let’s say $30,000 of combined Federal and State income tax. That’s $68,800 attributable to that last $100,000. The heirs would still get to keep $31,200 if the decedents didn’t give it to charity.
The choice is:
FAMILY: $ 31,200
GOVERNMENT: $ 68,800 (Federal and State taxes)
COMMUNITY: $ 0, or
FAMILY: $ 0
GOVERNMENT: $ 0 (Federal and State taxes)
COMMUNITY: $100,000 to charity,
A charitably inclined person might lean more to making the gift of the IRA to charity.
What makes someone charitably inclined? Connection to the charity. Seeing the good that the charity does. Recognizing that the government support for many charitable organizations has been severely diminished. Do you want to support Music and the Arts (theaters, museums, etc.), Medical Research and Medical Care, Custodial Care organizations, Educational Institutions, Houses of Worship, Support for orphans, the homeless, veterans, and so much more?
Let’s be sure that we diagnose before we prescribe. Discussion of charitable remainder trusts, charitable gift annuities, donor advised funds, and more may not make sense if the client’s idea of charitable giving is $5,000. If the client is charitably inclined, what is the best asset to give to charity during lifetime? If you are 70½ or older, direct gift from retirement account to charity makes the most sense. Make a gift of ordinary income property.
If you are under 70½, then gifts of appreciated assets with low cost basis make sense. Yet, most gifts to charity are made in cash. Most of us have some capital gains on our tax return just from re-balancing our portfolios. Instead of giving cash to charity and then paying a capital gain, give the capital gain property to the charity.
Let’s assume that you have $10,000 of cash and $10,000 of stock with a cost basis of $2,000.
GIFT OF CASH TO CHARITY: $10,000
SELL THE CAPITAL GAIN ASSET: $10,000
BASIS: ( 2,000)
GAIN: $ 8,000
TAX: ( 1,600) if 20% Fed and State
NET TO YOU: $ 8,400
GIFT OF CAPITAL GAIN ASSET TO CHARITY:
KEEP THE CASH: $10,000
NET TO YOU: $10,000
The Utility of Life
What is the best asset to give to charity at death? The retirement accounts, and life insurance. Life insurance allows you to leverage your gift to charity. You may want to make a $1,000,000 gift to XYZ Charity, but can’t afford it. You may, however, be able to afford $10,000 or so each year for a death benefit that could be left to charity.
Many of us are actively involved in charitable organizations. So, let’s look at how best to engage, cultivate, and nurture potential donors. First, make sure you properly thank them for their gifts, and send a proper tax receipt. Second, like you do with your clients, make sure you keep in touch with them, on special events in their life. Third, make sure that they see the benefit of their individual contribution. Saying things like, “Don’t ever assume that your contribution is just a drop in a large bucket. Without your donation, we would not have been able to do ____________.” Then, list the items that fit the value of their contribution. For example, “Yes, we raise millions of dollars every year. But without your contribution, one less child would benefit from our services.” Or, “a child would have one less hot meal, without your contribution.”
For us, as advisors, finding out which charities our clients support helps us build our relationship with those clients. ◊