Strategies to Maximize Charitable Giving

Graphic image featuring words about charitable giving.

You might have read how the 2018 tax changes would have a dire effect on charitable giving, but at Briaud Financial Advisors, we always look for the silver lining. The increase in the standard deduction combined with the cap on property and state income taxes has certainly changed the game a bit, but tax-optimization strategies remain to help you maximize your charitable contributions. If you were among those who thought donating to charity was a thing of the past based on some of the news reporting, we can forgive you for that.

While tax laws have changed, one thing has not: The generosity of donors, especially in our community of Bryan/College Station, Texas. We know, and research proves, that tax savings have never been the principal motivation for giving, but it certainly helps. And, here are just a few of the ways you can maximize your charitable giving:

1. You can benefit by giving from your current income;

2. You can make donations from your required minimum distributions; and

3. You can make arrangements for charitable contributions upon your death.

Charitable Giving from Current Income

Grouping two or more years’ worth of charitable giving (the lingo we use here is bunching) into one year is a strategy that can minimize your average taxes, but only if 1) you take the maximum $10,000 property tax deduction in the same year; 2) you are able to give at least $15,000 to charity. This is then alternated with a year of no charitable giving and utilizing the standard deduction. There is some planning involved with this scenario, but the savings can be worth the effort. See an example here that illustrates this strategy by reading Case Study 1. Click the button below.

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One increasingly popular option to facilitate charitable giving is a Donor-Advised Fund. These accounts are offered by most major financial institutions, and they allow you to make one contribution that is then distributed over time to 501(c)(3) charities of your choice. You receive an immediate tax deduction and the simplicity of a single transaction.

Appreciated assets, such as real estate and stocks, are good choices for Donor-Advised Funds and charitable giving, in general, if you don’t need the income from these assets. Some Donor-Advised Funds are even able to accept complex assets, such as restricted stock and limited partnership interests. This is a great opportunity for charitable-minded investors or business owners to manage more illiquid assets.

The benefit of gifting these assets is that you receive an immediate income tax deduction for the current market value and the capital gains that accompany the investments are never taxed — neither to you, nor the charity. If you do need the income but wish to ultimately gift these assets, see Gifting the Remainder below.

Gifting your RMDs

Once you reach the spry age of 70 1⁄2 and you have assets saved in a Traditional (or Inherited) IRA, you are required to take minimum distributions (RMDs) each year so that the government can start to collect on the taxes you have been deferring. If you gift directly from your IRA to a qualified charity then it is tax-free to both you and the charity. See how this would help our fictional client Professor Banks by reading Case Study 2.

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One relatively new way to do this is with a special checkbook provided by participating financial institutions. For example, many of our clients write checks directly from their Fidelity Traditional IRAs to make charitable donations throughout the year. This option requires some careful recordkeeping for tax purposes. Your CPA thanks you in advance.

Gifting the Remainder

Hopefully we are all planning for our assets to outlive us and by a safe margin. This is the life stage where many people consider giving, even if they did not do so earlier. Some choose to give exclusively to family and some only to a charity, but many will do both. Designating a charity as primary or secondary beneficiary on your pre-tax retirement account allows the charity to receive the funds tax-free. If you give the same assets to an individual, they will have to pay taxes so it is better to name people as the beneficiary of non-retirement accounts or Roth IRAs. These simple planning strategies allow you to maintain control and use of your assets through life, while assuring what’s left goes where you want it to go as tax efficiently as possible. Be aware that your last will and testament does not determine where your retirement assets (or any other asset with a beneficiary designation) go, and it is often insufficient to assure your charitable goals will be achieved! There are additional estate planning opportunities around this topic that can reduce estate taxes and income taxes to your beneficiaries. Read about Barbara’s endowment by clicking the button below.  Call us to learn more.

Trusts of various kinds can accomplish more complex distributions, help minimize estate taxes if needed, and bypass probate. One particular trust, known as a Charitable Remainder Trust (CRT), will accept appreciated assets and provide you (and another, if you wish) with income for life then pass the remainder to a charity. If your chosen charity is a single, large nonprofit organization, they may offer a charitable gift annuity contract which functions like a CRT but without the expense and complexity of a trust.

Doing our Part for Charitable Giving

At Briaud Financial Advisors, we practice what we preach. We know charitable giving is good for the soul and for financial planning. We are proud to be part of the generous Bryan/College Station community, where we are committed to service through active involvement and financial support of local charities. Not only do we provide paid time off for our staff to volunteer their time via service projects, many of us serve on nonprofit boards, as well. Briaud donates 1% of revenue annually to non-profit organizations that make our community a better place for all of us.

Our expertise in charitable giving can help you reduce taxes and ultimately provide more money to the causes important to you. Please contact us with any questions about your charitable giving, a key part of your personal financial plan.

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Please note: All case studies are fictional and do not represent actual scenarios or outcomes.

Smiths Case Study: Charitable Giving from Current Income

John and Melissa Smith are longtime residents of their mid-sized Texas city. They both attended the nearby university and expect to raise their two children there as well.

John has always had an entrepreneurial spirit. After he graduated, he started a roofing company, leveraging his part-time work throughout high school and college into a business opportunity.
Melissa fell into real estate. She discovered it allows her to balance her role as a mother and her talent for working with other busy people. She enjoys helping them find the best home available in their price range.

While both have been successful in their careers, they remained modest in their spending. So, their combined $300,000 per year income allows them to comfortably give to local charities and their church. While they intend to give regardless of any tax benefits, the charitable deduction has helped them give more than they could have otherwise.

The 2018 tax law changes presented a challenge to the couple when they learned about the cap on itemized deductions of $10,000 for property taxes. This was an issue for them because Texas has relatively high property taxes to help make up for its lack of income taxes.

John and Melissa are grateful to be able to give 10% of their salary ($30,000) per year to their church and to a few other charities close to their hearts. Under the new tax law, giving at this rate each year is not as advantageous as it was previously.

Like most people, John and Melissa would give regardless of the tax benefits. However, by working with Briaud Financial Advisors, they learned if they are able to defer payment one year and give $60,000 in the subsequent year they would actually reduce their tax bill by a total of $4,370 over the course of two years ($2,185 per year). That’s a good start toward a well-earned family vacation!

This technique, further detailed below for spreadsheet enthusiasts, is known as bunching deductions, and it’s one of the many strategies we use at Briaud to help our clients give and save money at the same time. Please feel free to contact us to see how we might be able to help you.

Spreadsheet showing tax advantages of bunching charitable donations.

Prof. Banks Case Study: Gifting from Minimum Distributions

Professor Banks will always be known by that name, even though he is 5 years into retirement. He dedicated his life to the pursuit of excellence in chemistry and the students who shared his passion. While shaping young minds and publishing extensively, he managed to accumulate sufficient assets to fund a comfortable retirement.

Now that he has reached the age of 70 ½, Professor Banks is required to begin taking required minimum distributions (RMDs) from his IRA. His pension and Social Security income already provide a reasonable standard of living, especially so because he has only himself to support. While the additional income is not entirely unwelcome, he is concerned that these distributions stand to increase his taxes.

As part of our comprehensive services, Briaud Financial Advisors engages in proactive tax planning. If Professor Banks were a client (and an actual person), we would reach out to him the year before his first RMD and help prepare him for the upcoming tax year.

After evaluating his specific circumstances, it is quite likely we would recommend that he make his annual gift of $8,500 to the Boy Scouts of America directly from his IRA. This qualified charitable deduction option has been available for a while, but it has become more valuable with the increased standard deduction. The illustration below outlines a common scenario:

Spreadsheet showing tax advantages of making charitable donations via required minimum distributions from your IRA.

Note that in addition to the federal tax savings of $1,870, making the qualified charitable deductions directly from his IRA also reduced his adjusted gross income, which dropped him into a lower Medicare income range. This saved him an additional $798 in premiums for the year.

Please feel free to contact us to see how we might be able to help you.

Giving: A Widow’s Case Study

Barbara is the proud matriarch of a thriving local family. She and her late husband Harold raised two thoughtful and successful children that have between them brought three cherished grandchildren into her life. Barbara believes that it was her own work ethic through school and in her small CPA practice that helped her provide for her family and inspired them to pursue their own career paths with a sound financial sensibility.

She would never have been able to attend Texas A&M University without the President’s Endowed Scholarship program that made her not only the first person in her family to earn a college degree but a member of a rarefied group of female students who braved the early days of co-ed attendance at the historically military (and male) university.

In the years since Harold’s passing, Barbara has turned her to attention to her own estate planning and has discussed her plans with her children and with her financial advisory team at Briaud Financial Advisors. Her Social Security income combined with her IRA distributions provide more than she requires for a comfortable living, but she needs to retain control of most of her assets through her life in the event she needs long term medical care.

Her dream has always been to be able to provide another student with the same opportunity that she had to attend A&M. The recent 50th anniversary of this program further inspired her action. Together with her Briaud team, and working with the Texas A&M Foundation, she devised a plan to endow a President’s Scholarship with $100,000.

Barbara readily agreed with our recommendation to name the Texas A&M Foundation as a beneficiary of her Traditional (Pre-Tax) Individual Retirement Account. Being tax savvy, she quickly understood that not only does she get to keep control of the assets in the event she needs long-term medical care, she accomplishes her goal and reduces future taxes to her children.

The A&M Foundation is a qualified charity, so it will not pay taxes on the gift and the donation will reduce Inherited IRA taxable distributions to her high tax-bracket children. Depending on the assets remaining and their own situation at the time, her children may elect to disclaim their inheritance, allowing the non-charitable assets to pass to the secondary beneficiaries (their children), thus further reducing the family’s overall tax burden.

In the end Barbara was able to:

  • Provide a gift to Texas A&M while keeping control of the assets
  • Reduce future taxes to her children by giving from her IRA
  • Optimize the distribution of her modest estate

If you are interested in learning more about making your own charitable dreams come true, contact us today.