At a Glance:
- There are several strategies our team has identified that allow executives to maximize their charitable donations while minimizing taxation.
- Four tax-efficient charitable planning strategies include establishing donor-advised funds, donating highly appreciated stock, donating real estate, and converting required minimum distributions to qualified charitable distributions.
- These strategies can be implemented under the guidance of a financial advisor who specializes in executive-level charitable gift planning.
As a top-level executive, you are likely among some of the top income earners in the country. You are also likely among the top charitable givers in the country and have many humanitarian causes you’re passionate about and support.
Our goal today is not to tell you how you can make a large impact in this world by supporting charities—you already know that. But what you may not know is there are tax-efficient charitable planning strategies that can allow you to maximize your charitable impact, while benefiting your financial plan.
4 Tax-Efficient Charitable Planning Strategies for Executives
In our decades of experience working with executives to maximize their charitable giving while minimizing taxation, we have identified several effective strategies. Below are four strategies we recommend exploring in your charitable giving endeavors. With the help of an experienced executive financial advisor, this strategies can help you make the most of your charitable giving this year.
This strategy may be one of the most commonly overlooked when it comes to minimizing your tax bill and maximizing your charitable gift. A donor-advised fund (DAF) is set up by you, the donor, with the help of a trusted wealth manager, for the purpose of earmarking funds for charitable gifting. One of the benefits of placing charitable contributions into a DAF is that it allows you to take a tax deduction for placing the money into the fund, even if you don’t designate a charity for it in that same year. The money is also allowed to grow as it sits in the DAF until the day you designate a charity for it to be distributed to.
For example, if you knew you wanted to donate to multiple charities next year, but you desperately needed to take a tax deduction this year, you could set up a DAF and place the money into the DAF until the next year (or any following year) when you felt comfortable naming your charities of choice.
This also works well for executives who want to contribute to a building fund that has not yet been launched. You can begin to place money into a DAF, take a charitable tax deduction each year you do so, and then send the funds to the charity when the building campaign is launched. The flexibility and effectiveness make this a tax-efficient charitable planning strategy for executives to know.
Donate Highly Appreciated Stock
Nearly all top-level executives accumulate a large concentrated stock position from their employer through various forms of equity compensation over the years. This can be an issue in and of itself, but regardless of how you accumulated your concentrated and likely highly appreciated stock position, one strategy to alleviate some of that stock from your portfolio is to donate it to charity. Unfortunately, many people make the mistake of selling their stock and then donating the proceeds to the charity itself.
When you donate appreciated stock to a charity, you actually do the charity a favor by donating a higher dollar figure than if you would have sold the stock, removed the capital gains tax portion, and then donated the leftover cash. This is a tremendous benefit to the charity that you want to support. Likewise, for you, donating the appreciated stock to the charity directly removes the burden of paying a large capital gains tax bill as well as gives you a larger charitable donation tax deduction. It truly is a win-win scenario.
Donate Real Estate
Over the years, our financial planning team has also noticed that many, if not most, executives own real estate investments as well as a traditional financial investment portfolio. This is a great way to diversify yourself into hard assets. It can also maximize your charitable donation while minimizing your capital gains taxation.
When you donate real estate that you no longer have a need for, or that has accumulated a large capital gains tax bill over the years, you are greatly helping the charity of your choice because charities are not required to pay capital gains taxes on the proceeds from the sale of the real estate. Meanwhile, you are able to deduct as a charitable contribution the full fair market value of the real estate as reported by a qualified appraisal. This makes this a little-known and tax-efficient charitable planning strategy for executives to know.
Convert RMD to Qualified Charitable Distributions
Lastly, let’s take a look at a unique way to leverage the required minimum distributions (RMDs) you must take starting at age 70½ from your qualified plans. As a top-level executive, you have likely set yourself up for financial success throughout your retirement, so the likelihood of needing those RMDs for income is low. This puts you in a great situation to essentially never pay taxes on that money that you saved in a qualified plan.
When you convert your RMDs into qualified charitable distributions, you simply designate a charity for the qualified account to send the RMDs to directly. This charitable donation will offset any taxes otherwise owed on that qualified money, thus turning the funds into qualified charitable distributions. This amount does not count against your charitable gifting limits, which makes it a very effective strategy.
Implementing Tax-Efficient Charitable Planning Strategies
No matter what season of life you find yourself in, these charitable planning strategies can help you maximize your giving potential while limiting your taxation amount. With the help of an experienced executive financial advisor, you can easily implement one or more of these strategies to make the most impact on the causes you feel passionate about.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for tax-efficient charitable planning.
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