Charitable Giving Plan

The end-of-year tax planning season is upon us; a time when high-income earners begin looking for opportunities to minimize their tax burden.

While much of that focus is on funding retirement plans and after-tax income deferral programs, charitable gifts represent another wonderful opportunity to reduce tax liability, while doing good in the world at the same time.

However, charitable giving is only as successful as the plan behind it. Here are some frequently asked questions about charitable giving:

How much can I deduct?

Generally, you can take an itemized deduction on your income taxes for contributions of money or property to a qualified organization or "for the use of" a qualified organization. A contribution is "for the use of" a qualified organization when it is held in a legally enforceable trust for the benefit of a qualified organization. If you give property to a qualified organization, you generally can deduct the fair market value of the property at the time of the contribution. Your deduction for charitable contributions generally cannot be more than 50% of your adjusted gross income (AGI), but in some cases 20% and 30% limits may apply. The 50% limit is typically for gifts of cash to qualified organizations, and the 30% limit is typically for gifts of appreciated property.

What assets should I give?

Charities love cash, of course, but other assets are also welcome (although they may be difficult for the charity to sell, hold, or manage). Certain assets, such as closely held stock, are difficult to give, as what you can deduct from your current income is not the same as what you can deduct when you give away items such as cash or publicly traded stock. Highly appreciated securities are often ideal assets to give, as you may deduct the full fair market value and avoid payment of the capital gains tax as well.

There are dozens of rules for all sorts of assets, such as for clothing, household items, retirement accounts, vehicles (cars, boats, and airplanes), property subject to a debt, partial gifts of property, fractional interests, business inventory, and patents/intellectual property. Working closely with your tax advisor and financial team is critical in gifting the right asset and taking the right deduction.

Is there a way to ensure that a donation is used according to your wishes?

Yes, you can give to a charity with "strings attached." Most gifts are made outright to public charities during life (leading to an income tax deduction) or at death in a will or revocable living trust (leading to an estate tax deduction). However, you may wish to retain an interest in an asset rather than give it outright to a public charity.

For example, you may want to retain an interest in the income stream of an asset but take a charitable deduction for making a gift of that asset today, or you may wish to give the income stream of an asset away but keep the asset in your family. You may be concerned with "mission drift," where a charity might stray from its core mission in future years. You may also wish to give today, while correlating that gift with your estate tax plan. There are literally dozens of structures to consider that address these and many other concerns.

Do you have any other words of advice?

  • Believe in the mission. Any plan for charitable giving should be founded on a belief in the charity's mission.
  • Choose a qualified organization. Make certain that the Internal Revenue Service considers your chosen charity eligible for tax-deductible charitable contributions.
  • Create a rock-solid plan. You need to work with your financial and tax advisors to isolate your Core Estate (the assets you can't afford to give away) from your Excess Estate so that you know what you can afford to give away and the best structure to accommodate that gift.
City National Bank, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person of any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.