Charitable giving for retirees

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Charitable Giving Options for Retirement Planning

HM PaysonMany people donate to their favorite charities each year, making cash gifts by check or credit card. But depending on your assets, life stage and goals, there are many more options for charitable giving. This note outlines the basic vehicles for giving throughout life and at death. And since some methods of charitable giving require more planning than others, it’s never too early to start thinking about your philanthropic options.

When to give?

Charitable giving can be done during lifetime or at death. Before making a lifetime gift, you must be confident that you won’t need the assets you’re giving away. Lifetime charitable giving will provide you the benefit of income tax deductions, a reduced estate size (that will eventually be subject to estate tax), and the joy of seeing your gift at work. On the other hand, giving at death may provide your estate with a deduction against estate taxes. And while lifetime gifts to individuals are subject to the annual gift tax exclusion ($15,000 for 2018), donors can make unlimited gifts to charity for estate tax purposes. The methods of charitable giving outlined below can be used during your lifetime or at death.


The simplest way to support your charity is to mail them a check. Lifetime cash gifts to most charities provide the donor with an income tax deduction for the amount given, up to 60% of the donor’s adjusted gross income (AGI). Plus, cash gifts can be made last-minute.

Appreciated Stock

A gift of appreciated stock provides more tax benefits than a cash donation. If a donor makes a gift of stock with unrealized long-term capital gains, he or she can claim an income tax deduction of the stock’s full fair market value, plus avoid the capital gains tax that would be due upon selling the stock. As a result, the donor pays less in tax, and the charity gets a larger donation. However, the limitation on deductions for appreciated stock is 30% of AGI.

Retirement Assets

Tax-deferred assets like retirement accounts provide significant income tax benefits during life. At death, however, they are subject to estate tax in the donor’s estate and to income tax when heirs take distributions. However, donating tax-deferred assets to charity gives the donor’s estate a tax deduction. For that reason, if you are going to leave assets to charity, you should consider using tax-deferred assets first, and leaving your heirs other assets that will get a “step-up” in basis at your death.

Giving retirement assets during life can also provide a tax benefit. If you have reached age 70 ½ (required minimum distribution age), you can transfer up to $100,000 per year directly from your IRA to charity (known as a “qualified charitable distribution”). You will not receive an income tax deduction for the gift, but the amount given to charity counts towards your annual RMD requirement and is not included in your taxable income.

Charitable Trusts

Split interest trusts, such as charitable remainder trusts and charitable lead trusts, are irrevocable trusts, funded with the donor’s assets, in which the income interest is separate from the remainder interest.

A charitable remainder trust pays income to an individual, often the donor, either as a fixed dollar amount (annuity payment) or a fixed percentage of the trust principal (unitrust payment), for a set term of years. At the end of that term, the remainder passes outright to charity. When the trust is funded, the donor receives a charitable income tax deduction for the value of the remainder interest. Plus, charitable remainder trusts can be funded with appreciated stock, which can be sold in the trust without capital gains tax consequences.

A charitable lead trust pays income (either an annuity or unitrust payment) to a charity for a term of years, and, at the end of the term, the remainder is paid out to an individual or individuals. When the trust is funded, the donor receives a gift tax deduction based on the actuarial value of the income stream to the charity.

Associated costs include legal fees for the preparation of the governing trust document, accounting fees for the annual trust income tax return, and trustee fees for the trust administration.

Donor-advised Funds

A donor-advised fund (“DAF”) is an account that is part of a public charity to which an individual can donate securities and receive a charitable income tax deduction.

The donor acts as an advisor, making suggestions about when to make grants, which charities should receive grants, and how much to give. This provides a means for ongoing philanthropic involvement for the donor and his or her family. DAFs are also good vehicles for donors wanting anonymity, since grants can be made anonymously.

DAFs are simple to establish and have no initial set-up costs, although operating costs and initial minimum funding amount vary depending on the fund. The main drawback is that the donor serves only as an advisor and does not have total control over the management and administration of the fund.

Private Foundations

The most complex form of charitable giving, private foundations are charitable entities that obtain tax-exempt status from the IRS and file annual tax returns.

Donors receive an immediate charitable deduction of up to 30% of AGI for cash gifts and up to 20% of AGI for securities. This also removes assets from the donor’s estate, potentially reducing future estate tax liability.

A private foundation also enables a donor to pass philanthropic values on to future generations, since the donor and his or her family can have ongoing involvement in grantee selection, investment management and the foundation’s administration.

Private foundations are subject to complex tax regulations, therefore establishing and running one requires expert tax and legal counsel. Among other requirements, private foundations must distribute approximately 5% of their assets each year, and are subject to penalties if they fail to do so. They also must pay a small tax on their income (usually 1-2%).

Other Gifting Considerations

In order to take a charitable deduction on one’s income tax return, a donor must itemize deductions. However, due to the recent tax law changes which increased the standard deduction, fewer people are likely to itemize. With this in mind, donors may want to consider bunching charitable gifts: giving a larger amount every 2-3 years instead of smaller amounts each year.

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