Charitable Giving Strategies That Would Make Jeff Bezos Proud

If you find that you are looking for a better way to make charitable gifts, you are not alone. In fact, it turns out that you have something in common with billionaire Amazon executive Jeff Bezos. Bezos took to Twitter last year for ideas on charitable giving strategies – and the question was so popular that it got the attention of the likes of –well –Madonna, among others (The Conversation, 2017).

While your personal challenges may be different than those of Bezos, chances are you are looking for your gift to be both meaningful and tax-efficient.

This is where I see a place for underutilized strategies like qualified charitable IRA distributions. Before you start writing a check, take a look at the giving strategies that have worked well for these clients and might work for you too.

The following are hypothetical examples for illustration purposes only. Actual investor results will vary.

Case #1: A Strategy to Help Replace Lost Income

Situation:

Mrs. Jones, an 80 year old needed a way to increase her income as a real estate investment of hers unexpectedly started to dry up.

In addition, she had a significant amount of appreciated stock (worth several hundred thousand dollars)not generating much income. But her hands were tied—she was not able to reposition these stocks into income-generating investments without incurring 6-figure capital gains.

Solution: In this example she decides to extract $150k of appreciated securities from her portfolio to fund a charitable gift annuity. The gift annuity is generating an income of over $10k/year, representing a payout rate of 6.8%.

At her death, the annuity will be distributed to two organizations that she was planning to support anyway.

Benefits:

This strategy may save her from incurring a six-figure capital gains bill and can create a new income stream which is not tied to market performance. She also realized a significant tax deduction with 5 year carry-forward. In this case, based on the cost basis of her contributed assets, only 20% her annuity income will be taxed as ordinary income for the next 8 years, and 45% will be taxed at the lower capital gains rate; the balance is tax-free.

In addition to the new income and the ample tax benefits, funding the gift annuity can also be very personally fulfilling for her, as it gives her the satisfaction of funding significant charitable gifts while she is alive.

More on Charitable Gift Annuities

Charitable gift annuities are relatively easy to establish. Unlike a Charitable Remainder Trust (CRT), you do not have to establish a trust. You can establish a gift annuity directly at a larger charitable organization, community foundation, or through your advisor (for example, Raymond James Charitable). Establishing the gift annuity outside of the receiving organization may provide some flexibility to change the beneficiary. For example, you can name multiple charitable beneficiaries or change the beneficiaries more easily than you could if the annuity were held directly by the charitable organization.

Note also that not every charity is financially stable enough to exist in perpetuity, and not every charity has a gift annuity program to participate in.

Case #2: A Strategy to Minimize and Defer Capital Gains

Situation:

A real estate owner, Mr. Smith, was selling off fully depreciated real estate and was bracing for the impact of a significant capital gains bill. He also needed to replace the income generated by the properties.

Mr. Smith also had a life insurance policy originally intended to help pay anticipated estate taxes of $1MM. Between reducing the size of his estate and changes to the tax code, he no longer expected to have an estate tax liability.

Solution:

Mr. Smith contributed $500k of property to a charitable unitrust (CRT) and is taking annual income of 5%.

Instead of naming just one outright charitable beneficiary, a Donor Advised Fund (DAF) was named beneficiary of the CRT to enable gifts to be stretched out for years to come. With his two children named as successor advisors, they will be able to continue making gifts in his name and honor and can include their own children in the giving process.

At his death, the proceeds of the life insurance policy will replenish the assets that were used to fund the trust.

Benefits:

Thoughtful planning and coordination with Mr. Smith and his CPA can result in a plan to save and defer taxes while helping him replace lost income. The overall implementation of the plan, including other components such as 1031 exchanges will result in over $400k in tax savings for Mr. Smith from over $800k in capital gains exposure (from about $4MM in proceeds from the sale of real estate).

These hypothetical highlights the importance of getting a plan in place before it is too late. If he first sold off the real estate and then sought advice, he wouldn’t have been able to use these strategies as effectively.

By naming a DAF as the beneficiary of the CRT, he is also creating a lasting legacy that his children and grandchildren can continue. Each child with their family will be able to continue the legacy of his giving and keep him connected to subsequent generations.

More on Charitable Remainder Trusts

Charitable giving done this way can be a surprising yet effective way to generate income, and more—itcan sustain a legacy and a family bond. If already charitably inclined, the strategy can allow him to essentially pre-fund the next 10 years of gifts so that he could get the benefit of the deduction and income now.

Another option is a charitable unitrust, which offers a degree of flexibility. Whereas with a gift annuity the payout rates are set and not malleable, with a CRUT you can design your plan to generate more or less income, with a minimum of 5%. This flexibility is helpful in designing a plan to best fit your goals,whether you need more income, a larger deduction, or want to maximize your gift to charity.

If you have significant assets to donate and would benefit from flexibility, it may make sense to consider a CRUT. While a gift annuity is relatively easy to establish, a CRUT will require you to create a trust and has more complex accounting. You may wish to use a corporate trustee for more involved services such as trust accounting and oversight. There are other considerations in electing this strategy, so be sure to work closely with your advisors.

#3: Settle an Estate Peacefully While Minimizing Taxes

Situation:

The mother of four children passed away, leading to a trust being distributed to her four children. If they were to liquidate the trust assets and take the proceeds, over $300k of capital gains would be borne by the four of them.

Solution:

The children can opt to receive some positions in kind and use some of the appreciated positions to fund a DAF. Instead of a tax bill, they can now take a deduction! In the future, they can make charitable gifts from the DAF in lieu of cash. And again, the DAF will help bridge one generation to the next as gifts are made, as each time the children make a gift from the fund they will be making them in the name of their parents and grandparents.

Benefits:

Taking some of the distribution in kind allows them to keep control of how and when positions are sold,gifted, or repositioned.

If some of the children are in high-income households and are also charitably inclined, this strategy may help them meet some of their goals and reduce tax burden.

An Answer to “How Does a Charitable Donation Affect My Taxes?”

Given the recent tax reform, this is an especially popular question.

Here’s the answer: there is no one answer.

As the above cases demonstrate, every situation is different.

And while many people wait until the end of the year to make their charitable gifts, you may inadvertently miss out on opportunities by taking this approach. It takes time to evaluate which strategies are the best fit in a given year and how much can be funded among other considerations, so if you are inclined to explore these options, don’t wait until December.

If you are wondering “how should I be making charitable gifts,” then let’s set up a call!

Sources

The Conversation. (11 July 2017). Jeff Bezos has asked for charitable giving advice – here’s what he should do with his money. Retrieved from http://theconversation.com/jeff-bezos-has-asked-forcharitable-giving-advice-heres-what-he-should-do-with-his-money-80592.

Any opinions are those of Karen Coyne and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is complete or accurate. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ AND CFP® in the U.S. Please note,changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The hypothetical case studies presented are for illustrative purposes only, and not intended to reflect the actual performance of any particular security or investment. Individual cases will vary. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. There can be no guarantee that any objective will be met. Annuities contain guarantees and protections that are subject to the issuing insurance company’s ability to pay for them. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.To learn more about the potential risks and benefits of Donor Advised Funds, please contact us. Please be aware that there may be substantial fees, charges and costs associated with establishing a charitable remainder trust. Links are being provided for information purposes only.Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.