We are discussing & recommending to all of our clients to consider opening a Charitable Giving Account/Donor-advised fund. Charitable Giving Accounts have many advantages over the traditional ways of charitable giving.
One of the biggest is record keeping. You make one or more contributions to your giving account during the year. So at tax time there are only one or two tax receipts to track down. If you misplace the information the Charitable giving account has all the information available 24/7. During the year you simple log into your secure giving account (Checks can only be sent to 501(c)(3) public charities) put in the name, address and EIN of the charity and amount. The Giving account automatically sends a check to the charity of your choice. Works just like on line bill pay and you receive a receipt the check has been sent. You can also send checks anonymously.
Another value of the giving account is your ability to increase charitable gifts by avoiding capital gains taxes (Federal, State & NEW Medicare tax on Income over $200K Single & $250K married). This allows you to give more to the charity of your choice and less to the government.
Here’s how it works –
You inherited 100 shares of Apple in 1990 @ $12 dollars per share ($1,200) today those share are worth $55,000. If you sold those shares today you have a capital gain of $53,800. For a Married couple with income over $250K, you would owe $11,800 Capital gain tax, $2,134 Medicare Investment Income tax & $3,427 NJ Income tax for a combined tax bill of $17,361. You net $37,639 after taxes. If you were feeling charitable you would have $37,639 to give to charity and receive a charitable deduction for $37,639 for a tax savings of approximately $13,175.
The better way would have been to contribute the 100 Shares of Apple to Charitable Giving Account avoiding the $17,361 in taxes. So now you have $55,000 to give the charity and you also receive a charitable deduction for the full $55,000 for an approximate tax savings of $19,250. By directly donating appreciated shares, you made a larger charitable gift and saved more in taxes!
It is a huge tax advantage using a Charitable Giving Account plus makes it much easier to donate long-term appreciated securities and parse out to the charities of your choice.
Another advantage is to over fund the Charitable Giving Account during high income years. You receive a larger tax deduction (while still working) and can continue giving in retirement without tapping into your current cash flow. Think of it as a charitable IRA. You fund while working and dole it out during retirement.
Once the funds are contributed to the Charitable Giving Account the funds can be invested in wide variety of investments (Money Markets, Bond Funds, US Stock Funds & International Stock Funds). Yet another advantage is the growth of the funds is tax free and can be given to charity at a later date.
Another advantage is the Charitable Giving Account is not part of your estate and can be passed on to the beneficiaries of your choice.
The only potential drawback is once the money goes into the account it has to be given to a charity. The funds can never be withdrawn for personal use.
If the idea of putting money into a charitable trust doesn’t work for you consider gifting appreciated securities directly to the charity. You will receive the full deduction for the amount contributed and avoid Federal and State taxes on the appreciation.
Of course for this to work you have to be charitably inclined.