By Carl Trevison and Stephen Bearce
Think Strategically When Donating to Charity
Planning ahead for taxes may help increase your charitable giving’s impact. A variety of strategies are available for incorporating tax planning into charitable giving. Your particular situation will help determine which strategy, or strategies, may be right for you.
Estate taxes are unlikely to be an issue
Although your primary goal in charitable giving is to help make the world a better place, keep in mind that being strategic in you giving may lead to a win-win situation for you and your favorite causes.
You may have heard estate taxes are often a primary concern when considering a charitable giving program. By making gifts, an individual can reduce his or her estate’s value and potentially reduce or eliminate the federal estate taxes the heirs would eventually have to pay.
However, Congress changed laws governing federal estate taxes over the last several years so they now apply only to estates valued at $5,490,000 or more (in 2017). Married couples can help protect twice that amount from estate taxes by employing strategies designed for that purpose.
(To learn more about these strategies, contact us.)
As a result of these changes, federal estate taxes are no longer an issue for most Americans. But when it comes to charitable giving, there are still other tax benefits to consider.
Avoid capital gains taxes to help maximize your gift’s impact
Charitable giving can be as simple as writing a check and dropping it in the mail. But before you pull out the checkbook, think about different ways to donate that may have tax benefits. Consider this example:
Suppose you’re holding in a taxable account $100,000 of stock you paid $10,000 for several years ago.1 The IRS would call the $10,000 your “cost basis” in the stock. If you want to make a significant donation to a charity, you could:
1. Sell the stock
2. Pay long-term capital gains taxes of up to 20% on the difference between the proceeds and your cost basis
3. Donate what’s left to your favorite charity
On the other hand, you could simply give the stock directly to the charity and avoid the capital gains tax. The charity can then sell the stock without incurring capital gains tax and wind up having more than if you sold the stock yourself.
1. This example is for illustrative purposes only and does not reflect the performance of a specific investment. It assumes no events took place during the time you owned the stock that would affect your cost basis.
Help increase your investment income
Suppose you hold in a taxable account a substantial amount of stock that’s paying you little in the form of dividends and you’re looking to generate current income. As in the example above, you could sell the stock, pay any capital gains taxes, and use what’s left to purchase other investments or make charitable gifts.
However, if you’d like to avoid immediate capital gains taxes, one strategy to consider is a charitable remainder trust, or CRT.
After you establish a CRT, you can donate the stock to the trust, which may give you a tax deduction for a portion of your contribution. The trustee can sell the stock without incurring immediate capital gains taxes and purchase other investments that have the potential to pay a larger amount of income. Keep in mind, this income may be taxable to you.
You determine the payment you want to receive from the CRT based on a percentage (not less than 5%) of the donated stock’s fair market value. (IRS factors may limit the income payout.) Remember the larger your payout, the less of a tax deduction you may receive for making the donation.
Pooled-income funds provide another alternative
Although CRT offers a number of advantages, there are costs involved. For example, you’ll need to enlist an attorney to draw up the trust documents, and depending on whom you choose, you may have to pay for the trustee’s services.
For a less costly alternative, think about a pooled-income fund. It shares many features of certain CRTs, such as avoiding capital gains tax on your gift and the ability to make future contributions.
A pooled-income fund is created and maintained by a public charity. As its name implies, the fund comprises assets contributed by many different donors, which are pooled and invested together. All the donors are paid a share of the net income the fund earns. The income amount depends on the fund’s performance and is taxable to you.
2. Assumes the donor is in one of the 25% up to 35% tax brackets
When an income beneficiary dies, the charity receives an amount equal to that donor’s share in the fund.
These funds are less flexible than CRTs. For instance, you cannot choose your income payout; you will be paid the net income the fund earns. The payout will vary from year to year, depending on what the portfolio generates.
In exchange for a lack of flexibility, a pooled-income fund offers simplicity. Rather than having your own trust document drafted, you will be provided with a standard agreement that lets you transfer your assets to the charity.
Other strategies to consider
These are just a few charitable giving strategies for you to think about. Others available include:
• Charitable lead trusts
• Charitable foundations
• Donor advised funds
• Charitable gift annuities
Contact us for information on any of these alternatives.
This article is designed to provide accurate and authoritative information regarding the subject matter covered. It is made available with the understanding that Wells Fargo Advisors is not engaged in rendering legal, accounting or tax-preparation services. If tax or legal advice is required, the services of a competent professional should be sought. Wells Fargo Advisors’ view is that investment decisions should be based on investment merit, not solely on tax considerations. However, the effects of taxes are a critical factor in achieving a desired after-tax return on your investment.
The information provided is based on internal and external sources that are considered reliable; however, the accuracy of the information is not guaranteed. Specific questions on taxes as they relate to your situation should be directed to your tax advisor.
This material has been prepared or is distributed solely for informational purposes. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.
Trust services available through banking and trust affiliates of Wells Fargo Advisors. Insurance products are available through non-bank insurance agency affiliates of Wells Fargo & Company and underwritten by non-affiliated insurance companies. Not available in all states.
This article was written by/for Wells Fargo Advisors and provided courtesy of Carl M. Trevisan, Managing Director-Investments and Stephen M. Bearce, First Vice President- Investments in Alexandria, VA at 800-247-8602.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.
© 2017 Wells Fargo Clearing Services, LLC. All right