insight magazine

Seven Strategies to Supersize Year-End Charitable Giving

After record charitable contributions in 2020, the threat of increasing income and estate taxes should have advisors and their clients looking to maximize the tax benefits of their giving. By Daniel F. Rahill, CPA, JD, LL.M., CGMA | Winter 2021

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2020 was a difficult year for many, but not without its bright spots. One of those bright spots was the fact that charitable giving in the United States broke records, up 5.1 percent from 2019 levels to reach $471.44 billion. Three of the four major sources of giving grew year-over-year in 2020: Individual giving rose by 2.2 percent, bequest giving rose by 10.3 percent, and giving by foundations increased by an astounding 17 percent. Only giving by corporations declined (6.1 percent)—perhaps a reflection of the year’s business challenges and uneven recovery.

So, what’s in store for 2021 charitable giving? As you’d expect, pandemic challenges will likely continue to drive charitable giving, but another factor may also spur another record-setting wave of generosity. In October 2021, Democratic leadership announced a framework deal on the Build Back Better Act. This proposal would impose a tax surcharge on high-income individuals of 5 percent on income over $10 million plus an additional 3 percent on income in excess of $25 million; expand the 3.8 percent net investment income tax, limit the current reduced qualified small business gain exclusion, and make permanent the disallowed business loss limitation; plus many other tax increase proposals.

While many legislative steps remain to turn these tax increase proposals into law, these proposed increases may make charitable giving more attractive than ever this year as the value of a deduction grows alongside tax rates. To counteract higher taxes, taxpayers will likely incorporate giving strategies into their tax planning and may prefer to transfer appreciated property to charity rather than pay higher capital gains taxes on a sale. Estate planning will also be affected, as high-wealth individuals increase their charitable giving to maximize their tax benefits.

As long as natural disasters, pandemic repercussions, and tax perks continue to proliferate, we’re likely to see the kinder side of human nature expressed through generosity and philanthropy. And as CPAs and financial strategists, we’re also likely to ask ourselves: How can we make the biggest impact with charitable giving? Here are seven strategies to make donations really count.

Seven Strategies to Maximize Giving:

1. Qualified charitable distributions: While the 2021 Consolidated Appropriations Act extended some tax breaks, it did not extend the 2020 waiver of required minimum distributions (RMDs) from retirement accounts. That means RMDs must be made in 2021, and for taxpayers taking the standard deduction, a qualified charitable distribution is an attractive option. Individuals over age 70.5 can donate up to $100,000 from their IRA. This satisfies the RMD requirement, but the gift must go directly to a charity, not to a donor-advised fund or private foundation.

2. Charitable gift annuity: A charitable gift annuity is a contract between a donor and a charity under which the charity, in return for the donor’s gift, agrees to pay a fixed amount to the donor (and one more individual if the donor chooses) for the donor’s lifetime. Such payments include the earnings on, and a part of, the principal in the reserve account. The issuing institution guarantees the income, as it becomes a legal obligation of the charity. The creditworthiness of the charity is important as the donor will rely on the charity for income. The benefits include a lifetime stream of income plus a charitable deduction in the year of the gift equal to the net present value of funds estimated to remain for the charity at death.

3. Pooled income funds: A pooled income fund is a trust composed of pooled gifts that are invested together and maintained by a public charity. Income from the fund is distributed to both the fund’s participants and named beneficiaries according to their share of the fund. Donors to the fund choose the other income recipients to receive quarterly payments for life. Upon a donor’s death, the value of the assets will be transferred to the beneficiaries.

4. Charitable remainder trusts: A charitable remainder trust (CRT) is an irrevocable trust typically funded with highly appreciated assets. The CRT is structured so that there is a current beneficiary—either the donor or a named individual—and a remainder beneficiary, which is a 501(c)(3) charity. The CRT makes annual distributions to the donor in either a fixed amount or as a percentage of the value of the trust. These are paid for a period of years that can either be for the donor’s life or for a set period not to exceed 20 years. The remainder value of the CRT is then distributed to the charity.

The tax benefits of a CRT include a potential charitable deduction in the year of the transfer equal to the amount that will remain for charity, as estimated based on the donor’s life expectancy. In addition, a CRT is exempt from tax on its investment income. Thus, a trustee of the CRT can sell appreciated assets and reinvest the full proceeds, allowing diversification from a concentrated position in a tax-efficient manner. If created under a will, a CRT allows for estate tax savings with the value of the remainder interest passing to the charity. A CRT can be an effective strategy for retirement planning as the trust can provide income distributions that do not commence immediately. For example, the trustee can sell the appreciated assets, reinvest the proceeds, defer payment of tax, and delay distribution until the donor is age 65 (and perhaps in a lower tax bracket).

5. Charitable lead trusts: A charitable lead trust (CLT) is an irrevocable trust that provides a fixed amount or a percentage of the trust’s assets to a charity for a set period or for the life of an individual or individuals. The remainder interest is either retained by the donor or given to a non-charitable beneficiary, usually a family member. A CLT is often created for lifetime giving and for estate planning purposes.

In many cases, the income tax benefits of a CLT may not be as significant as the estate and gift tax benefits. For income tax purposes, a CLT can be structured as a grantor trust, meaning the income earned by the trust is taxable to the grantor, or a non-grantor trust, meaning the income earned by the trust is taxable to the trust. If the contribution to the CLT is made during the donor’s lifetime, then the donor will also be eligible for a charitable tax deduction for the interest going to charity. If the remainder beneficiary is not the donor, then the donor could be subject to gift tax on the actuarial value of the remainder interest.

6. Donor-advised funds: A donor-advised fund is a program of a public charity that allows you to make irrevocable contributions to the charity, become eligible to take an immediate tax deduction for the full value of the contribution, and then make recommendations for distributing the funds to qualified nonprofit organizations. Donor-advised funds often accept many types of assets, allow donors to name successors to continue family involvement, and afford donors the right to remain anonymous. A donor-advised fund can be a good giving vehicle if the donor wants simplicity in grant-making, is comfortable serving in only an advisory role, wants higher charitable deduction income limitations, and wishes to support multiple charities.

7. Private foundations: A donor-advised fund is often compared to a private foundation, another vehicle for making lifetime grants to charity. A private foundation is formed by a family or an individual who must then apply for tax-exempt status with the IRS. Contributions to a private foundation are deductible—up to 30 percent of a donor’s adjusted gross income for cash and 20 percent for appreciated securities.

As year-end approaches and tax changes near, now is the time to review smart charitable giving strategies—both to address philanthropic goals and to maximize tax benefits.

Illinois CPA Society member Daniel F. Rahill, CPA, JD, LL.M., CGMA, is a managing director at Wintrust Wealth Management. He is also a former chair of the Illinois CPA Society Board of Directors and a current board member of the American Academy of Attorney-CPAs.

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