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Learn more about each gifting strategy
Charitable IRA Maximization
For IRAs with large balances, income and estate taxes can reduce the overall value of the account by 70% or more upon the owner’s death. Charitable IRA Maximization allows IRA owners to have RMDs of up to $100,000 paid directly from their IRA to a charitable organization, without the distribution counting as income for tax purposes.
Upon the owner’s death, the IRA is bequeathed to the charitable organization of their choosing. As a result, their estate receives a full estate tax deduction for the bequest, and since charities do not pay taxes on gifts made from “income in respect of a decedent” (untaxed income that was never paid during the IRA owner’s life), both estate and income taxes on the IRA are eliminated.
Benefits
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Charitable distributions allow donors to get both the standard deduction and the charitable contribution deduction without any AGI limits
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IRA owners can significantly reduce the overall estate tax bill for their heirs
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Using some of the RMD amount to fund premiums on a life insurance policy can give your heirs a larger payout tax-free
Drawbacks
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Only an ideal strategy if the IRA is not needed to help fund retirement
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If over $100,000 is distributed, the excess is still subject to income tax
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Withdrawals greater than the RMD amount (if less than the $100,000 allowable maximum) can reduce the value of the IRA
Donor Advised Fund
Donor Advised Funds (DAFs) offer a way to use your estate to support philanthropic causes. DAFs are funded with cash, securities, and other assets, and contributing to a DAF allows you to take a tax deduction at the time of the contribution. Upon your death, the assets are donated to the charity of your choosing.
With a DAF, you can deposit assets to be donated to charity over time. The account is managed by a sponsoring organization, and as the donor, you recommend how to invest those assets and where they should be donated (almost any IRS-qualified public charity can be a recipient).
Benefits
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No capital gains taxes on assets placed in a DAF; tax deductions are immediate and can be taken on current market value of assets rather than their value at the time of purchase
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Assets placed in a DAF are exempt from estate taxes
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DAFs offer the option to donate any remaining assets in your fund to the charity of your choice upon your passing
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Can be used to purchase life insurance as a means to endow gifts
Drawbacks
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The fund—not the donor—has the final say on how the assets are distributed
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Many DAF sponsors charge high fees for managing the accounts
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Contributions to DAFs are irrevocable
Gifting Appreciated Stock/Assets
A gift of appreciated stock or other assets is a great way to support a charitable organization while also receiving significant tax benefits. Appreciated stock is subject to a maximum 20% capital gains tax, but by donating that stock you can avoid the capital gains tax—and still deduct the full fair-market value of the donated stock from your income taxes.
Donating appreciated stock can also help reduce future capital gains and therefore lower your future tax burden. If you have a stock that you believe will continue to increase in value, you can donate the appreciated shares to charity and buy new shares at the current (higher) price, thereby resetting the cost basis—and if the stock does go down, your higher cost basis means a larger write-off for tax purposes.
Benefits
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Helps reduce portfolio concentration risk without having to liquidate and incur a significant tax event
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Donating stock directly (rather than cashing out and donating the proceeds) means the charity receives a larger overall donation
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Allows the donor to reset their cost basis and reduce future capital gains taxes
Drawbacks
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This strategy is not as effective if the appreciated stock is less valuable than when you bought it, as you lose the option to sell the stock for tax-loss harvesting purposes
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Smaller charities may not have brokerage accounts, and the cost of liquidating the donated shares can cut into your donation
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Donors must itemize their tax return in order to receive the income tax deduction for donated shares
Charitable Lead Trust
Benefits
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Gifted assets are no longer in your estate
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You can generate an income stream from the proceeds of the CLT
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You receive a partial tax deduction for donated assets, along with avoiding capital gains tax on appreciated assets that have been gifted
Drawbacks
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Once it has been created and assets donated, it is very difficult to reverse or “undo” the process
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You no longer have legal control of the assets donated to the CLT
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In some cases, distributions may be taxed as ordinary income
Charitable Remainder Trust
Benefits
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Allows for a steady income stream for a set term of years or for life
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You receive an immediate income tax deduction on the amount donated
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Helps reduce or even eliminate capital gains, gift, and estate taxes
Drawbacks
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Assets that are passed to charity do not pass to heirs upon your death
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Transfers to a CRT are irrevocable
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Terms of the trust cannot be changed once established
The Family Foundation
Benefits
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Allow for organized, targeted giving to those most in need
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Donors can also be trustees in the foundation, allowing them to retain control of how their donations are used
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No capital gains tax on appreciated stock, and donors can claim a charitable deduction for the full market value of that stock as well
Drawbacks
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Setting up a family foundation requires a significant commitment of time and money, particularly legal and accounting fees
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Private family foundations are subject to a 1.39% annual excise tax on net investment income
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Recordkeeping and regulatory requirements can be onerous
