Tax-Efficient Charitable Giving Strategies For Year-End Planning

Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report

Advisors Can Support Clients’ Holiday Charitable Giving With Innovative Tax Strategies That Maximize Gift Values, Reduce Taxes And More

Turning the corner into November, the holiday season is now in sight, with Thanksgiving décor displayed at stores and shopping centers. As always, clients celebrate the holiday season in many ways, including donating to their favorite charities, coinciding with year-end tax planning.

Advisors can respond to their clients’ generosity with innovative tax strategies for charitable giving, in cooperation with clients’ tax advisors. To learn some innovative strategies that help clients and charities achieve the best outcomes, we spoke with Jerry Michael, President and Co-Founder of Smartleaf; Brian Schmidt, Manager, Financial Planning Support & Advanced Case Solutions of Avantax Wealth Management; and Bryan Eberle, President of Nepsis Tax Solutions, part of Nepsis.

We asked each of them: As charitable giving during the holiday season approaches, clients will be searching for tax-efficient, year-end giving strategies. What are some innovative, tax-efficient strategies that advisors should consider to bring charitable giving to the next level for their clients?

Bryan Eberle, President Of Nepsis Tax Solutions, Nepsis

Bryan Eberle, President, Nepsis Tax Solutions, Nepsis

Charitable giving not only resonates with many clients’ personal values but can also offer meaningful tax benefits. Here are innovative tax-efficient strategies to consider:

Impact investing, which refers to investments made into companies, organizations or funds with the intention to generate both social and environmental impact alongside a financial return. Impact investing aligns a client’s portfolio with their values, while potentially offering tax incentives.

Charitable Lead Trusts (CLTs), which provide a fixed annual amount to a charity for a set term. At the end of the term, the remaining assets go back to the donor or their beneficiaries. CLTs provide immediate tax deductions and potential reduction in estate or gift taxes.

Bunching charitable deductions: Instead of making regular annual donations, clients can “bunch” multiple years of donations into one, especially beneficial with the increased standard deduction. Maximizing itemized deductions in one tax year can optimize tax savings.

Gifting appreciated real estate, like a home, commercial property or vacant land provides a charitable deduction based on the property’s fair market value and avoids capital gains tax.

Setting up a private foundation allows clients to manage charitable donations, involve family members and leave a legacy.

Always collaborate with tax professionals to ensure maximum benefits.

Brian Schmidt, Manager, Financial Planning Support & Advanced Case Solutions, Avantax Wealth Management

Brian Schmidt, Manager, Financial Planning Support & Advanced Case Solutions, Avantax Wealth Management

A Donor-Advised Fund (DAF) allows clients to support qualified charities and nonprofit organizations through a charitable investment account, conferring immediate tax benefits. When opening a DAF, the donor irrevocably transfers assets (cash, publicly traded securities, restricted stock or even complex, nontraded private business interests) to the respective donor-advised fund sponsor.

Advantages of a DAF include enabling clients to make an irrevocable charitable contribution, receive an immediate tax deduction, seeing the assets potentially grow over time and controlling the recommending of grants going forward. DAFs also allow for flexibility with contribution frequency as well as types of assets donated. Simply put, DAFs allow clients to create charitable legacy and choose how they are acknowledged for their donations.

DAFs are often used by clients with highly appreciated assets that they donate instead of selling and realizing capital gains, who are selling a business, have experienced an increase in wealth, want to control the distribution of their wealth, or want to involve family with their charitable endeavors.

It’s common for clients who establish a DAF account to remain with their financial professional for many years.

Jerry Michael, President And Co-Founder, Smartleaf

Jerry Michael, President & Co-Founder, Smartleaf

The most tax-efficient way to make a charitable contribution is to donate highly appreciated securities. This has two advantages compared to the alternative of selling the securities and donating the proceeds, less capital gains taxes: the charity gets a larger contribution and you get a bigger tax deduction (if you itemize).

This is not a new idea. What is new is advisors having the capability of doing this quickly and efficiently.

Sometimes, the decision is easy. Donating highly appreciated concentrated positions simultaneously improves the portfolio by lowering risk and maximizes tax savings. If the concentrated positions have multiple tax lots, you need to make sure you’re donating the ones with lowest tax basis. It’s not hard, but it can be time consuming.

The situation gets trickier if the portfolio has no seriously overweighted positions. In this case, you’ll need to make tradeoffs between maximum tax savings and maximum portfolio improvement. At worst, going for maximum tax savings by just donating the most appreciated securities will sufficiently unbalance the portfolio so that it needs rebalancing, realizing taxable capital gains in the process. In this scenario, you could see your “tax management” strategy increase your taxes.

Fortunately, these sorts of complex tradeoffs are where technology shines, automatically balancing the sometimes competing goals of low taxes, low risk and low trading costs.

Michael Madden, Contributing Editor and Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.

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