December 29, 2016

MBAF's Leif Novie Discusses the Best Tax-Planning Strategies for Charitable Donations in the Miami Herald.

Most high net worth individuals realize the value of giving back. The rewards of charitable giving stretch well beyond a tax planning strategy. Giving to charities of your choice is a way to support your personal values and beliefs, to ensure your legacy, and to give back to the communities that have helped to foster your success.

Of course, no two taxpayers are the same, your ability to give will depend largely on your individual circumstances, but here are some general tips to make the most out of your charitable giving — particularly as the year comes to a close.

What to give?

You may think that the easiest way to make a charitable gift, is to merely write a check. However, believe it or not, writing a check, no matter how big, may not be the best way to help your charity, or yourself. From a taxation standpoint, the type of property or asset you give can have very different consequences. In fact, you may not realize that you can be limited in the amount of cash you can actually give and still receive a tax break. The tax deductions for cash gifts to a charity generally may not exceed 50 percent of your adjusted gross income (AGI).

Rather than giving “cash,” a much better approach is to donate appreciated public securities instead. By contributing appreciated securities, not only do you get a charitable deduction, you can avoid the “capital gains tax,” that would be assessed, had you held on to the appreciated security.

For example, let’s look at “Joe” who is a high net worth individual in the top tax bracket of 39.6 percent. He has publicly traded stock with zero basis. By contributing to a charity, such as the United Way of Miami-Dade, he saves 39.6 percent in tax and avoids 23.8 percent of tax for a total savings of 63.4 percent. This savings can be more if “Joe” is also subject to state taxes.

Also, keep in mind, if you would like to endow artwork, or other items of value, non-cash contributions in any asset category exceeding $5,000 generally require an appraisal with the exception of the aforementioned publicly traded securities.

Another way to make a non-cash donation to a charity is by donating a valuable large ticket item. Many charities will accept the donation of cars for this purpose, but here in South Florida, boat and yacht owners have the unique opportunity to donate their vessels to charity. As long as you donate to 501-C-3 nonprofit, and they use it for charitable purposes, you can receive the full fair market value of the vessel as a lawful IRS tax deduction, and in most circumstances the charity will even arrange for the pickup and delivery of the boat.

How to give

Beyond “what to give,” the next question really becomes, “how to give.” Do you want to give your donation all at once, or would you like to be able to give to your charity a more sustainable gift over the course of years, to have a more lasting impact?

One way to do this is with a Chartable Lead Trust (CTL). A CTL provides a way for you to make a sizable donation to a charity, and at the same time get a substantial tax break, and eventually, leave assets to members of your family. In this way, CTLs are as much a “charitable giving strategy,” as they are an “estate planning” strategy. Your charity benefits by receiving a steady stream of annuity income for as long as the trust lasts. You, and your heirs benefit, because any leftover assets that go to your non-charitable beneficiaries can be transferred, free of federal gift and estate taxes.

Other strategies

There are some other giving strategies you may want to consider. These include:

  • Charitable remainder trusts: A charitable remainder trust works well with highly appreciated assets in that the trust can sell the assets contributed without paying the gain, and the grantor can essentially pay tax as distributions are received from the trust.
  • Funding gifts via IRA withdrawals: If you are over 70 ½ years old you can fund a qualifying charity directly from your IRA.

Check with your tax professional or wealth advisor to see which of these may be advantageous given your individual circumstances.

The value of giving

According to a recent Bank of America study on philanthropy, high net-worth individuals account for only 1.4 percent of the American population, and yet their charitable donations account for more than 70 percent of the total gifts to charity that come from individuals.

There is no question that the charitable giving of high net worth individuals does genuine good for our South Florida community. By taking a more strategic, planned approach to charitable giving, you not only can achieve more impact, but you can leave in place a formula that can ensure your legacy of giving, and support of our local charities for many years to come.

Click here to read the article on Miami Herald.