ELITE ADVISOR BEST PRACTICES

Strategies for Tax-Wise Year-End Giving - Part Two

More charitable planning ideas for “The Most Wonderful Time of the Year”

By Michael King

Key Takeaways:

  • Donor advised funds (DAFs) can be used strategically to provide a number of advantages, including enhanced tax benefits and greater planning flexibility.
  • The “give and hold” strategy in the context of business interest gifts can often maximize a client’s annual charitable deductions without decreasing their personal net worth.
  • Although the Charitable IRA Rollover expired at the end of last year, it is expected to be reinstated before the end of this year, so advisors should continue to keep this opportunity on their radar screens.


As we discussed in Part One, year-end is an ideal time to discuss your clients’ charitable goals, objectives, and timing. In some situations you may want to encourage clients to accelerate gifts if they’ll be changing tax brackets, or also consider gifts of appreciated stock or non-liquid assets, such as real estate or business ownership interests. Here we’ll explore the “give and hold” strategy as well as charitable IRA rollovers and donor advised funds.

Accelerating testamentary charitable gifts

This “give and hold” strategy may be particularly appropriate for clients who are planning to make significant charitable gifts at death. To the extent that any such deathbed charitable gifts are made during the client’s lifetime, income tax benefits, in addition to estate tax benefits, may be realized. As previously illustrated, the “give and hold” strategy in the context of business interest gifts can often maximize a client’s annual charitable deductions, without decreasing their personal net worth (because of the continued growth and appreciation of the business). What’s more, this strategy may actually increase the client’s available cash flow due to the tax savings from the charitable deduction.

Even in situations in which a giver needs income from a particular asset, such as publicly traded stock or real estate, it may be possible to use a charitable remainder trust or charitable gift annuity to provide a stream of lifetime income, while simultaneously securing a charitable deduction, and perhaps even avoiding capital gain upon the sale of an appreciated asset used to fund the split-interest arrangement.

Charitable IRA rollover

Since 2006, individuals age 70½ and older have been able to gift up to $100,000 directly from their individual retirement accounts to public charities without having such distributions count as income for tax purposes. This tax benefit expired on December 31, 2013, marking the fourth such expiration since the provision was originally passed into law. Although both the U.S. House and Senate have proposed legislation to reinstate the Charitable IRA Rollover, no action has yet been taken to reconcile the two congressional bills or submit them to the president. Although there are no guarantees, the expectation is that this provision will in fact be reinstated by year-end.

Therefore, this planning option may ultimately be available for the 2014 tax year. Any such distributions made directly to charity will apply towards the IRA owner’s required minimum distribution. If that distribution has already been made, there is no mechanism to undo it, or to qualify the distribution in the event the provision is reinstated. If no required minimum distributions have yet been taken, and assuming a client may benefit from making a gift from his or her IRA, it would be prudent to delay any distributions until the law is reinstated—likely sometime in December. If ultimately the law is not reinstated, the minimum required distribution could always be made at the very end of the year. Another option if a year-end gift will be made in any event, is simply to request that the required minimum distribution is made directly to one or more public charities. This approach provides the greatest overall flexibility from a tax and charitable giving perspective.

It is important to note that a Charitable IRA Rollover does not provide the giver with a charitable income tax deduction; it simply avoids having to recognize such income on the IRA owner’s individual income tax return. As a result, this strategy is generally most beneficial to clients who either don’t itemize their personal deductions, or that bump into the maximum 50 percent AGI threshold, in which case additional charitable deductions could not fully be used in any event.

Strategic use of a donor advised fund

The use of donor advised funds (DAFs) have exploded in the last decade or so due to their significant tax advantages and the planning flexibility they offer. DAFs can be used in a number of important ways when it comes to year-end planning.

Many givers benefit from the unique opportunity to contribute assets to a DAF (and secure an immediate charitable deduction), while avoiding having to distribute the charitable assets immediately to an end-user charity in order to capture a deduction. This provides an opportunity for givers to consider carefully how their charitable resources are ultimately deployed, and which organizations are the most appropriate to partner with in order to reach the giver’s charitable goals. Again, you don’t want clients making hasty decisions simply to secure an immediate charitable deduction at the end of the year.

A DAF is also an ideal vehicle to receive accelerated charitable gifts as described earlier in the context of timing imminent gifts for maximum tax advantage, or gifts that would otherwise be made at death. If it is appropriate, for tax reasons, to accelerate gifts otherwise planned for the future, the DAF can easily serve as a storehouse that secures an immediate charitable deduction but allows distributions to be made over time—over months, years, or even longer.

DAFs are also ideal assets for receiving gifts of illiquid assets such as business interests and real estate discussed earlier. Gifts of these types of assets qualify for a full fair market value deduction when gifted to a DAF. This is a critical advantage over gifts to private foundations, which are limited to the asset’s income tax basis. In addition, because gifts of business interests and real estate often involve fairly large values, it is not unusual for givers to want to support multiple charities. A DAF allows a giver to make a single charitable gift, but ultimately have the cash flow produced by these assets, as well as the cash proceeds upon their ultimate sale, distributed to multiple charities.

Finally, clients who have private foundations (PFs) will often use a DAF to work in conjunction with and supplement the operation and administration of their PF. For example, a distribution from a PF to a DAF will qualify toward the PF’s 5 percent required minimum distribution. Such distributions allow PFs to ensure they satisfy the 5 percent distribution requirement (as severe penalties otherwise apply) in the event they haven’t yet decided on which charity or charities they want to support. In addition, more and more PFs are being “converted” to DAFs to reduce or avoid the time and costs related to the administrative, regulatory, and tax burdens generally associated with PFs. As the tax year comes to a close, this can be a good time for clients with PFs to evaluate the potential advantages of converting to a DAF, and possibly avoid the necessity of filing PF tax returns in future years.

Conclusion

For advisors, the Giving Season provides a unique opportunity to spread holiday cheer by ensuring their clients are well-versed in wise charitable planning strategies. Such advice will help your clients maximize their giving while seizing final opportunities for minimizing their income tax liability for the current tax year—perhaps a year-end “gift” from you to them.


About the Author

Michael King is Vice President, Gift Planning Services with the National Christian Foundation, headquartered in Alpharetta, Georgia. He serves as a charitable gift and estate planning attorney working closely with generous families and their advisors to maximize the amount and impact of their charitable giving through creative strategies that minimize taxes and maximize giving potential. Michael can be reached at mking@nationalchristian.com.