Hollywood and a general disdain for billionaires have given many Americans the impression that there is some secret way to give to charity as a way to save multiples of that amount in taxes. Unfortunately, or fortunately, that is not the case.
When you are giving to charity, that must be the primary intent. The tax savings that go along with it should be optimized by choosing the strategy that makes the most sense for you. This article is for those who are charitably inclined and also have a desire for retirement income. Lastly, if executed properly, these methods will save some tax bucks.
Charitable gift annuity
If you’re a Baby Boomer, it’s likely your alma mater has made you quite aware of its charitable gift annuity (CGA). Many college websites will even run an illustration to show you the tax benefits and income you’ll receive on an annual basis.
Here’s how it works:
- You make an irrevocable gift of cash or an appreciated asset to a charity. Universities are common beneficiaries, but it can be any qualified charity that has a charitable gift annuity
- You receive an immediate charitable deduction for a portion of the gift
- You receive a fixed income stream for a set period or for the rest of your life
- At the end of the period or your life, the remainder goes to or stays with the charity
Here’s where I would use this strategy:
- An appreciated asset is always a good starting point. If you bought Apple stock before you bought an iPhone or bought Nvidia stock before 2023, you may be a good candidate
- While these figures are subjective, I generally think this strategy makes sense for a single charity where the gift is between $50,000 and $250,000. If you get above $250,000, a charitable remainder trust may make more sense
- You feel strongly about the charity. Remember, this is an irrevocable gift. You cannot get the money back, and you cannot change the remainder beneficiary
Charitable remainder trust
This is a strategy we employ for clients who are generous but want to reserve the right to change who they are generous toward. As with your living trust, you will have to employ a trust and estate attorney to draft the trust. You will also have to use the services of a tax professional to file a trust tax return each year. Sound complicated?
Here's how it works:
- You make an irrevocable gift into a charitable remainder trust (CRT)
- You receive an immediate charitable deduction for a portion of the gift
- You receive a fixed income stream (through a CRAT) or a percentage of the balance in the trust (through a CRUT) for a set term or for the rest of your life
- At your death, the remainder goes to the beneficiaries listed in the trust
Because the mechanics sound, and are, very similar, it’s important to highlight some of the reasons I would opt for the CRT route over the CGA route:
- Desire for flexibility. The gift to the trust is irrevocable, but you can change the beneficiaries of the trust
- The complexity necessitates larger gifts to make sense. You must consider the cost to draw up the trust, file an annual tax return and manage the trust assets
- There can be multiple beneficiaries
- It gives the trustee control of the investments
- A CRT allows you to avoid a potentially large capital gain
In every situation that we have recommended one of these strategies, there have been two stories. First, the story of the charity and the impact that charity had on the client or is having on the world. Second, the story of the appreciated investment that allowed the donor to make such a large gift.
This article should not serve as a recommendation to do one or both. It should simply allow you to zoom in a little closer on what may make sense for you. But before you do, make sure you have the capacity to give. In other words, can you give a large gift and still maintain your lifestyle? Your financial plan answers that question. You can build one using the free version of our planning software here.
