Chapter 27: Charitable Giving

The values question first

Before any of the tax and structure discussion, there is a values question: do you want to be charitable? How charitable? In what cause areas?

Some people feel a strong pull toward charitable giving. Others don't, and that's okay too. Estate planning doesn't require charitable giving to be well-designed. It can include it thoughtfully, or not at all.

What doesn't work: including charitable giving reluctantly because it seemed expected, or excluding it when you wanted to include it because you didn't know how.

This chapter is about executing charitable intent well, whatever its scale.

The basic methods of charitable giving

From simplest to most complex:

1. Direct gifts during life. Write a check to the charity. Tax deduction for the year of the gift (subject to AGI limits, typically 60% for cash, 30% for appreciated assets).

2. Direct bequests in your will. Your will specifies: "I give $10,000 to [charity]." Simple and common.

3. Charity as beneficiary of retirement account. Name the charity as primary or partial beneficiary of your IRA or 401(k). Especially tax-efficient because charity doesn't pay income tax; heirs would.

4. Charity as beneficiary of life insurance. Similar concept; income tax-free either way but reduces estate for estate tax purposes.

5. Donor-Advised Funds (DAFs). Contribute to a sponsoring organization's DAF; take deduction now; recommend grants over time.

6. Charitable Remainder Trusts (CRTs). Give assets to a trust; receive income for life or term; remainder goes to charity at end.

7. Charitable Lead Trusts (CLTs). Opposite of CRT; charity gets income for a term; remainder goes to family. Useful in specific tax scenarios.

8. Private foundations. Create your own 501(c)(3) organization. Complex and expensive; typically for large estates with ongoing charitable intent.

9. Qualified Charitable Distributions (QCDs). For IRA owners 70½+; direct transfer from IRA to charity; counts toward RMD but not as income.

10. Pooled income funds. Similar to CRT but for smaller contributions.

The tax efficiency question

Not all charitable giving is equally tax-efficient. Coordinating with your tax situation can amplify your giving without costing you more.

Give appreciated assets, not cash

If you have stock, mutual fund shares, or other investments that have grown in value, giving them directly to charity is more efficient than selling and donating cash.

Example: Stock you bought for $10,000, now worth $40,000.

Option A: Sell stock, donate cash.

• Capital gain: $30,000.
• Tax on gain (at 15% long-term rate): $4,500.
• Net cash to donate: $35,500.
• Charity receives: $35,500.
• Your deduction: $35,500.

Option B: Donate stock directly.

• No capital gain recognized.
• No tax on gain.
• Charity receives: $40,000 (sells tax-free because it's a charity).
• Your deduction: $40,000.

Option B gives the charity more, gives you a bigger deduction, and avoids capital gains tax. Win-win.

Requirement: Asset must have been held more than one year (long-term). Short-term holdings are limited to cost basis for deduction purposes.

Give from the IRA if you're older

Qualified Charitable Distributions (QCDs) are extremely tax-efficient for donors 70½ and older.

How it works:

• Donor age 70½+ directs IRA custodian to send money directly to charity.
• Up to $100,000+ per year per donor (indexed).
• Counts toward RMD.
• Not included in donor's income.
• No deduction needed (because it wasn't income).

Tax comparison:

• Regular IRA distribution + charitable donation: IRA distribution is taxed as ordinary income; deduction offsets somewhat but subject to limits and only benefits itemizers.
• QCD: Bypasses income entirely; even standard-deduction filers benefit.

For charitably-inclined retirees, QCDs should be the default giving method.

Leave retirement accounts to charity at death

If you have charitable intent and are deciding which assets to leave to whom, retirement accounts (traditional IRAs, 401(k)s) are tax-efficient charitable bequests.

Reason:

• Heirs pay income tax on retirement account distributions (10-year rule for most beneficiaries).
• Charity pays no income tax.
• Giving the IRA to charity means no income tax ever paid on the assets.
• Heirs inherit other assets with step-up basis instead.

Example: You have $500K IRA and $500K taxable brokerage account. You want $500K to kids and $500K to charity.

Option A: IRA to charity, brokerage to kids.

• Charity: $500K, no tax.
• Kids: $500K brokerage with step-up basis. Can sell tax-free.
• Total family receipt: $1M, zero income tax.

Option B: Brokerage to charity, IRA to kids.

• Charity: $500K.
• Kids: $500K IRA, must distribute over 10 years paying ordinary income tax. Say 24% bracket = $120K in taxes.
• Total family receipt: $380K after tax.

Option A is $120K better for the family. Same charitable impact.

Bunch charitable giving into specific years

The Tax Cuts and Jobs Act (2017) raised the standard deduction so high that many people no longer itemize. If you give modestly each year, you may not be getting any tax benefit because you're taking the standard deduction anyway.

Strategy: bunch.

• Combine multiple years of charitable giving into one year.
• Itemize in that year (deduction exceeds standard); take standard deduction in other years.
• Net: same total giving, bigger tax benefit.

Tool for bunching: Donor-Advised Funds.

• Contribute multiple years of intended giving to DAF in one year.
• Take full deduction that year.
• Recommend grants to charities over subsequent years.
• Effect: big deduction year, ongoing giving.

Donor-Advised Funds in detail

DAFs have become a major charitable vehicle. Here's how they work:

Setup:

• Open account at a DAF sponsor (Fidelity Charitable, Schwab Charitable, National Philanthropic Trust, Vanguard Charitable, local community foundations, etc.).
• Contribute money or appreciated assets.
• Receive tax deduction in year of contribution (subject to AGI limits).

Management:

• Funds held by the sponsor.
• You recommend grants to qualified 501(c)(3) organizations.
• Sponsor typically invests the funds, so they grow tax-free before granting.
• Sponsor verifies recipient charities' qualifications.

Advantages:

• Separate timing of donation (for tax purposes) from actual charitable gift.
• Flexibility in grant recipients over time.
• Administrative simplicity (one deduction, multiple grants).
• Anonymity option for gifts.
• Can name successor advisors for continuation after death.

Disadvantages:

• Minimum investment required (typically $5K-$25K depending on sponsor).
• Some annual fees (typically 0.6%-1% of assets).
• Less oversight than direct giving (some criticism of assets sitting in DAFs vs. flowing to charities).
• Cannot benefit directly (no "consideration" in return).

For families with consistent charitable intent and some wealth, DAFs are often the right vehicle.

Charitable Remainder Trusts (CRTs)

A CRT is a split-interest trust: income for a term/life, then remainder to charity.

Basic structure:

1. You contribute appreciated assets to the CRT.
2. CRT sells the assets (tax-free, because it's a charitable vehicle).
3. CRT invests proceeds.
4. You receive income for life or a term of years.
5. At end of term, remainder goes to charity.

Two main variants:

Charitable Remainder Annuity Trust (CRAT): Fixed dollar amount per year.

Charitable Remainder Unitrust (CRUT): Fixed percentage of trust value (revalued annually).

Tax benefits:

• Income tax deduction upfront (present value of charitable remainder).
• No capital gains tax on assets when contributed.
• Income to beneficiary taxed on ordinary principles (not estate's tax character).
• Assets removed from donor's estate for estate tax purposes.

When CRTs make sense:

• Highly appreciated assets with low cost basis.
• Donor wants income stream.
• Donor has charitable intent.
• Donor's estate might benefit from reduction.

Complexity:

• Requires attorney to draft.
• Annual valuations and administration.
• Irrevocable — cannot undo.
• Minimum funding typically $100K+.

For the right donor, CRTs can be transformative. For most families, they're overkill.

Private foundations and family foundations

At the upper end of charitable giving, private foundations offer:

Structure:

• 501(c)(3) organization created by a donor or family.
• Funded with a significant initial endowment.
• Makes grants to other charities per its stated purpose.
• Family members serve as directors/officers.

Advantages:

• Complete control of giving strategy.
• Can involve family over generations (a "teaching tool" for philanthropic values).
• Permanent entity that can persist beyond donor's life.
• Strong family identity.

Disadvantages:

• Significant setup costs ($10K-$50K+).
• Ongoing administrative burden and costs (~1-2% of assets).
• Strict IRS rules (5% annual distribution requirement, self-dealing prohibitions).
• Public reporting required (Form 990-PF is public).

Economic threshold: Generally makes sense at $5M+ funded. Below that, a DAF is usually more efficient.

Charitable giving and family values

Beyond the mechanics, charitable giving is a way to transmit values across generations.

Approaches:

Include children in giving decisions. Even young children can have a voice in family charitable giving. Each person picks a charity for the year's giving; family discusses together.

Match adult children's giving. "For every dollar you give to charity this year, we'll match it." Teaches giving as a lifelong practice.

Name family members as DAF successor advisors. They inherit the giving practice.

Structure the will to continue charitable giving. Trust provisions can require continued distributions to specific charities or cause areas.

Family foundation as teaching vehicle. For larger estates, the foundation becomes a shared family project across generations.

Choosing charities

With tens of thousands of 501(c)(3) organizations, choosing can be overwhelming. Some practical guidance:

Start with causes you care about. Not what's trendy or what friends support. What moves you.

Vet the charity. Use resources like:

• Charity Navigator (financial health ratings).
• GuideStar / Candid (information about operations).
• GiveWell (for effective altruism-minded donors looking at evidence of impact).
• State Attorney General's charity registration (verifying legitimacy).

Look at the financials. Programs vs. overhead ratio (though this metric is sometimes misleading — well-run charities may spend reasonable amounts on administration). Sustainability of the organization.

Consider impact vs. intention. Some charities are effective at their mission; others are less so even with good intentions. Do some research on effectiveness.

Plan for continuity. If you leave a substantial bequest to a charity, confirm the charity is likely to still exist in 10-20 years (most established ones will; startups may not).

Local vs. national. Local charities often allow closer involvement; national ones often have more professional operations. Both have merit.

Size considerations. A large bequest to a small charity can be transformative for them. The same amount to a large charity is a rounding error. Consider where your gift has the most impact.

Charitable giving at death

Specific tax treatment of bequests:

Unlimited estate tax deduction for charitable bequests. Unlike lifetime giving (AGI-limited), testamentary charitable gifts have no limit.

Charitable "residue" bequests (everything left after specific bequests) are common and flexible.

Beneficiary designation charity giving (retirement accounts, life insurance) is simple and avoids probate.

Testamentary charitable remainder trust can be created by will; provides for family during their lives and charity at their deaths.

Common mistakes

1. Giving cash when you have appreciated assets. Wasteful tax-wise.

2. Not using QCDs if eligible. Retirees miss out on tax savings.

3. Leaving retirement accounts to family and non-retirement to charity. Backwards from tax efficiency.

4. Small bequests to tiny charities without verifying sustainability. The charity may not exist when you die.

5. Complex charitable structures for small gifts. CRTs and foundations for modest amounts don't justify the complexity.

6. Ignoring charitable intent. Some people are charitably inclined but don't plan, and end up giving nothing. Planning helps.

7. Going solo on complex charitable structures. CRTs, foundations, and CLTs need specialist attorneys and ongoing management.

What to do this week

If you have charitable intent:

1. Clarify your intent. How much? What cause areas? Which charities?
2. Choose a giving vehicle. Direct gifts? DAF? QCDs (if eligible)? Estate bequest?
3. Coordinate with your CPA for tax-efficient execution.
4. Document in your estate plan any testamentary gifts.
5. Consider family involvement in the charitable project.

If you have significant appreciated assets:

1. Use appreciated assets for charitable gifts rather than cash.
2. Consider a DAF for bunching.
3. Evaluate CRT or similar structures if assets are very appreciated and you want income.

If you're over 70½ with an IRA:

1. Use QCDs for charitable giving.
2. Coordinate with RMD strategy.

If you're planning an estate with charitable intent:

1. Name charity as IRA beneficiary (tax-efficient).
2. Leave appreciated assets to family (step-up basis).
3. Include charitable residuals if appropriate.

Next chapter: pet care plans. For families whose pets are family, planning matters.