How to pick the best year-end charitable giving strategy

As the holidays approach, philanthropic investors may be eyeing year-end gifts to their favorite charity. However, there are several options to consider with varying tax benefits, according to top advisors.

Nearly 90% of wealthy families gave to charity in 2020, according to a study on philanthropy from Bank of America, and while write-offs don’t drive most gifts, many are happy to trim their tax bill.

“The conversation starts by getting a client’s full financial picture, finding out what they’ve done in the past and their intentions going forward,” said certified financial planner Ryan Cole, vice president and director of financial planning at Bailard in San Francisco, ranking 97th on CNBC’s 2021 FA 100 list.

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Investors who itemize deductions may score a charitable write-off based on a percentage of their adjusted gross income, depending on the type of asset they give.

While someone may deduct up to 100% of their adjusted gross income for cash gifts for 2021 — and non-itemizing couples may claim up to $600 — donating cash may not offer the biggest write-off. 

The better opportunity may be donating investments worth significantly more than their purchase price because this helps clients skip the capital gains tax otherwise owed when selling.

“We look to give assets that have appreciated the most in a client’s portfolio,” said CFP Rachel Moran, a shareholder and director of personal wealth management at RTD Financial in Philadelphia, ranking 68th on the FA 100 list.

“They’re simply wiping out that capital gain,” she added.

Retirees age 70½ and older may consider so-called qualified charitable distributions, which involve a direct payment to an eligible charity from an individual retirement account.

Someone may transfer up to $100,000 per year without boosting their income and it satisfies required minimum distributions for retirees age 72 and older. 

“We actually use that strategy to try and reduce a client’s income to keep them below [the thresholds] for higher Medicare premiums,” Moran said.

Of course, retirees need to weigh how much income they need before making these transfers, Cole said.

While qualified charitable distributions may work for individual retirement accounts, someone with assets in a taxable account may consider donor-advised funds, which allow multiple gifts over time, Cole said.

“There are non-charitable benefits, as well,” said Cole, explaining how giving highly appreciated assets may also help to rebalance a client’s portfolio.

If someone isn’t likely to itemize deductions, they may consider “bunching” several years of gifts into one donation to exceed the standard deduction, Cole said.

The money may grow over time, and they can make gifts from the fund as they wish.

“It’s a nice way to formally track a history of gifts and any appreciation through investment growth,” Moran said.

However, donor-advised funds may have account minimums, and investors will pay annual fees based on the account balance.

For example, Vanguard Charitable and Fidelity Charitable charge 0.6% on the first $500,000, plus investment fees.

While donor-advised funds offer simplicity, individuals or families with substantial wealth may form a private foundation, with funding starting around $1 million, depending on the client, Cole said.  

Although private foundations offer families more control, they are significantly more expensive, with startup costs of $4,500 to $25,000 in legal fees, according to the American Endowment Foundation, plus operating expenses every year.

Moreover, private foundations must distribute a percentage of non-charitable assets every year to stay compliant with the IRS.