Giving to charity is relatively straightforward, but there are many ways to maximize your gift (and benefit) with just a little planning.
In this episode, I’m joined by Plancorp’s Sara Gelsheimer, a Senior Wealth Manager with deep knowledge of charitable giving strategies.
Listen now and learn:
- Questions to ask yourself when creating a charitable giving plan
- Important things to ask charities before giving
- Strategies for maximizing the tax benefit of your gifts
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Show Notes
With the end of the calendar year approaching, it’s fairly common for us to see a pickup in charitable giving. Developing a charitable giving plan helps ensure that you not only maximize your tax benefit, but that your gifts are directed to causes and organizations that align with your values.
For this episode, I asked Plancorp’s Sara Gelsheimer, a Shareholder and Senior Wealth Manager, to share her deep knowledge of charitable planning strategies.
Here are my notes from our conversation.
Charitable Giving vs Charitable Planning (1:11)
Charitable giving is simply the act of giving to charity. Charitable planning involves more meaningful and intentional thought. This can be broken down into two parts.
The first part is thinking about what missions matter to you most, and which charities align with those missions. The second part is financially focused on how to get the most bang for your buck from a tax and estate planning perspective.
Because there are an overwhelming number of charities and causes out there, Sara works through that first part of charitable planning with clients by asking questions, such as:
- What do I care about?
- What brings me joy?
- What do I enjoy doing?
When you can answer these questions, you can begin to narrow the focus and figure out the charities that align with those values.
Once you identify some charities you might like to support, the next step is evaluating charities that do a good job of putting their donors’ gifts to work. A good starting place is using GuideStar and/or Charity Navigator to look at a nonprofit’s Form 990, which the IRS requires nonprofits to file to publicize certain information.
A good rule of thumb is to see a charity spending at least 75% of their revenues on the mission as opposed to fundraising, administrative costs, etc. The higher the percentage, the more your gift is impacting the mission you care about.
Once you’ve gone through that first part of choosing nonprofits to support, Sara and the other advisors at Plancorp help clients think objectively about the best way to make those gifts from a tax, estate, and logistics perspective.
Sara also notes that charities value more than just dollars — they always appreciate people’s time and talent, whether that’s volunteering or joining a board.
Charitable Giving With Your Children and Grandchildren (6:45)
Sara has a lot of passion for instilling charitable habits in children. She has three young kids herself (5, 2, 1) and has been enjoying those conversations with her oldest.
She coaches others to begin having conversations with kids as young as three or four. It doesn’t have to be anything elaborate. For example, one of the charities Sara has been involved with supports people in Uganda. When they get pictures or cards from the girls they sponsor there, she makes a point to talk to her five-year-old about the differences in how they live or some of the things we have that they don’t.
Sara is also a fan of the three jar allowance system (save, spend, share) that I’ve written about in the past. The basic idea is that the child should split their allowance across those three jars. A related idea she mentioned that I really liked is when a child gets a gift card to somewhere like Target for their birthday or holidays; you could encourage the child to use a portion of it to buy a toy or hat/gloves for someone else that can’t afford it.
Again, it doesn’t have to be complicated or elaborate. Just having little conversations with kids and encouraging them to do things for others helps foster a sense of gratitude as well as create awareness of others’ situations and how we can make a positive impact.
Finally, you shouldn’t forget about getting your kids or grandkids involved with volunteering. Kids love to help and there’s no shortage of opportunities to have good experiences.
Maximizing the Tax Benefit With a Donor Advised Fund (12:00)
Getting a tax break via an itemized income deduction has always been one of the financial benefits of charitable giving, but the 2017 Tax Cuts and Jobs Act basically doubled the standard deduction. In 2022, the standard deduction for married filing jointly is $25,900. In 2023, it is $27,700.
So in order for itemizing deduction to make sense, you need to have more than the standard deduction amount. Things that qualify for itemized deductions include:
- Unreimbursed medical and dental expenses (but this is only allowed in the rare instance when those expenses are in excess of 7.5% of adjusted gross income)
- State and local taxes (capped as an itemized deduction at $10,000)
- Mortgage interest
- Charitable contributions
Sara gives the example of a married couple giving $5,000 to charity in 2022. They have $10,000 in state and local taxes, plus another $10,000 in mortgage interest. Add it all up and they have $25,000 – less than the standard deduction of $25,900.
It’s important to not let the tax tail wag the dog, but if you’re going to make charitable gifts, you might as well do it in the most tax efficient way. Sara notes that it’s common to see people giving a lot to charity without knowing they weren’t getting a tax benefit.
In the example above, rather than giving $5,000 a year to charity and missing out on the tax deduction, the married couple could consider making four years’ worth of gifts ($20,000) all at once to a Donor Advised Fund, which would bring their itemized deduction up to $40,000.
A Donor Advised Fund allows you to gift cash or securities into a fund and get a tax deduction in that calendar year. So in our example, the $20,000 gift made today is deducted in this year’s tax return. But you can make grants of any amount at any time from the Donor Advised Fund to the charitable organization of your choice.
Not only does this enhance the tax benefit of your gifts, but you also get an administrative break by not needing to keep track of a variety of gift receipts – you only need to keep the one that documents the initial gift to a Donor Advised Fund.
Some people use Donor Advised Funds for regular giving, particularly in situations where the person is bunching multiple years of gifts as described above, but others may invest the contributions for them to grow over time.
While this is obviously a wonderful tool for charitably inclined individuals, Sara notes that we often use them for clients experiencing a particularly high tax year due to the sale of a business, exercising stock options, or Roth conversions (of which we’re doing a lot because the market is down).
Tax Advantages of Gifting Securities vs Cash (18:00)
Regardless of whether you utilize a Donor Advised Fund or not, gifting appreciated securities has a greater tax benefit than gifting cash.
Sara gives the example of someone that bought Fund ABC for $20 a share, and now it’s worth $50 a share. As long as you’ve held it for at least a year, you can actually transfer those shares directly to a charity. And nobody pays capital gains tax on that $30 of appreciation.
So even if you’re giving a few hundred or thousand dollars a year and not getting the charitable deduction, giving appreciated securities allows you to eliminate a capital gain that you would have been taxed on had you liquidated it.
Rather than write a check to a charity, you can gift the appreciated security and then use cash to buy back the appreciated security – the end result being you reset the cost basis on your holding and the charity still gets the same gift from you.
Other Charitable Giving Tax Strategies (20:00)
When you turn 72-years-old, you’re mandated to start taking Required Minimum Distributions (RMDs) from your retirement accounts such as IRAs and 401(k) because those dollars have never been taxed before. All of the money pulled out that hasn’t been taxed (so basically everything excluding non-deductible IRA contributions) is treated as ordinary income.
With a recent tax law change, starting at age 70.5 you can make Qualified Charitable Distributions (QCDs) directly to a charity of up to $100,000 and not pay taxes on those distributions. So, much like gifting appreciated securities, this is money that will never be taxed (because you didn’t pay tax on it when it came into the account or while it was growing).
Not only is this a great way to make gifts for someone that is charitably inclined, but it also helps you shrink the future RMDs that must be taken (and the related taxes).
Another strategy Sara and the Plancorp team uses is opening Charitable Remainder Trusts (CRT). In these scenarios, the client puts highly appreciated securities into the CRT and receives an income stream from it over a certain amount of time. Then at the end of this timeframe, the remaining amount goes to charity.
So a person in a very high income year get an upfront tax deduction from the CRT, avoids paying capital gains on the appreciated assets used to fund the CRT, and earns income from the gift for a period of time.
Raising Charitable Children (23:30)
One of Sara’s favorite things she does near the end of the year is being a part of the family meetings her clients have with their entire families. These meetings cover everything from basic financial concepts to the roles within the parents’ estate plan. But for a lot of these meetings, charitable giving comes up.
Sara shares an example of a client who has a particularly large Donor Advised Fund balance due to some large contributions in high tax years. Because the couple is over 70.5, they’ve started making Qualified Charitable Distributions, so each year they allow their kids to allocate a portion of the Donor Advised Fund. The kids bring charities they’ve researched to the family meetings and collectively decide how to make gifts. At death, the kids will continue to make gifts from whatever remains.
If you want some other ideas like this, Sara suggests the book Raising Charitable Children by Carol Weisman.
The end of the year and holiday season is a really great opportunity to have meaningful conversations with your kids and grandkids.
Something as simple as talking about what you’re grateful for. An idea Sara shares that I really like is a gift for a parent or grandparent. When they ask a parent/grandparent what they want, tell them to do something nice for someone else and then draw a picture of it and send it to the parent/grandparent.
You might also consider making a gift in the kids’ names to something they really enjoy like the zoo or children’s museum.
Whatever you do, just keep it positive and keep the conversation going.
Resources
- Sara Gelsheimer, Shareholder and Senior Wealth Manager at Plancorp
- GuideStar
- Charity Navigator
- Raising Charitable Children by Carol Weisman
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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