Giving away our hard-earned money is one of the most selfless things we can do as humans.
If we’re honest with ourselves, though, there’s something in it for us also. We get the satisfaction of being part of something bigger than ourselves. Of doing good in the world and making it a better place.
There are also tax advantages involved. This is where many wealthy people miss out on a big opportunity; and if you’re reading this, you’re wealthy!
Writing a big check is generous. But there’s a better way to give that can allow for a larger gift, more money to stay in your pocket, or a combination of the two.
Many people also think they just aren’t wealthy enough to make a large donation. That they need to keep their money for a secure retirement. I have good news for these people too. There are tools that can help you create a legacy for your charity and receive a steady income for life!
Let me show you the best way to give to charity. You’ll minimize your taxes. And you’ll create a secure retirement in the process.
1 Don’t give cash. Do this instead…
Cash is not the best way to give. Yet it’s the most common. You get an income tax deduction for your gift, which is nice as long as you can itemize. Cash gifts are better than non-deductible gifts in that case.
If you have taxable investments, however, the best way to give to charity is to donate your most highly appreciated assets. This could be a stock or real estate that’s now worth much more than you paid for it.
Do well by doing good. —Benjamin Franklin
If you sell an appreciated asset, you owe capital gains taxes on the growth. If you took depreciation on real estate in previous years, its tax basis is even lower than your original purchase price. This makes your capital gain that much larger.
By giving the asset to charity, you avoid paying the capital gains tax and you get an income tax deduction for the full value of the asset! Here’s an example:
Let’s say you bought 100 shares of Microsoft stock at $84 per share 5 years ago. It’s now worth $241 per share. Your 100 shares have grown by $157 per share, a capital gain of $15,700!
Table 1 shows the difference between selling the stock to give cash to charity and giving the shares directly to charity. It assumes you’re in the 15% capital gain and 22% income tax brackets, and that the entire gift is above the standard deduction.
In this example, you gave $2,355 more to charity and saved an extra $518 on your taxes by donating the shares directly! It’s a win-win for you and the charity.
Note: If you didn’t sell the stock and gave the same amount of cash from savings, you would still have the future tax liability on the stock. So it would look the same on paper as if you sold.
1.1 Ways to get above the standard deduction
The standard deduction is high in the US as I write this. Most people do not itemize anymore. However, if you have an asset with high capital gains, you may be in a position to itemize with a large charitable gift.
If you aren’t planning on giving that much money in a single year, you can “bunch” multiple years of giving into a single year.
I discussed standard deduction amounts and strategies for itemizing in How to Pay Zero Taxes on 401k and IRA Withdrawals. Other than bunching charitable contributions and having high medical expenses relative to your income, you can pay extra property taxes in a single year to help get over the line.
2 Structure your gift in one of these 3 ways
You can give stocks or real estate directly to a charity. But you should consider a Donor Advised Fund (DAF), Charitable Remainder Trust (CRT), or Charitable Gift Annuity (CGA) if you’re bunching multiple years of giving or making a big legacy gift.
2.1 Donor Advised Fund
A DAF works like a charitable bank account. You can contribute to a DAF without knowing exactly where you want the money to go. Then you can make smaller gifts to one or more charities over time.
This makes a DAF perfect for bunching contributions. If you want to fund a charity for 3 years on a single contribution, for instance, you can put it in your DAF on year 1. Then in each of the next 3 years you can give 1/3 of the gift to the charity. If you don’t know which charity you want to give to 3 years from now, the money can be held in the DAF until that decision is made.
Funds can be invested conservatively in your DAF until they’re sent to charity. The money must go to charity, however. You can’t get any back.
If you want some of the money to come back to you, use a CRT or CGA.
2.2 Charitable Remainder Trust
A CRT is an irrevocable trust that provides a partial tax deduction in the year of the gift and regular payments to you and/or your spouse for life. After the payments stop, whatever is left in the trust goes to your designated charity.
This can be an important part of your estate plan if you wish to leave a gift for charity but also need stable cash flow through retirement.
You can be the trustee and control how the funds are invested. Or you can select another trustee.
There are two types of CRTs you should consider:
- Charitable Remainder Annuity Trust (CRAT) – A CRAT pays a fixed amount to you and/or your spouse for life. The amount never changes, and does not adjust for inflation.
- Charitable Remainder Unitrust (CRUT) – A CRUT pays a percentage of remaining assets to you and/or your spouse for life. The payment changes every year, which can help adjust for inflation if the assets in the trust are invested appropriately.
Payments must be between 5% and 50% annually. The allowed payment percentages depend on the number of years that payments are expected to be made. The charity must also be expected to receive a reasonable sum of money when payments stop.
This article from EstatePlanning.com has more information on CRTs.
2.3 Charitable Gift Annuity
A CGA is similar to a CRAT except that the donation gets pooled with other funds that the charity controls. You have no control over how the funds are invested. Instead, you exchange those funds for an annuity contract that locks in the payments that you and/or your spouse will receive for life.
The American Council on Gift Annuities (ACGA) sets the maximum rates for annuity payments.
Similar to a CRAT, CGA payments may be subject to taxation and will not adjust with inflation. It’s also important to note that a non-charitable annuity will typically pay higher rates than a CGA since there is no donation being made at end of life in that case.
This article by Fidelity has more details on CGAs.
Big charities can help you set up a CRT or CGA, but you may also need help from your own lawyer.
Finally, you can set a DAF as the charitable beneficiary if you want the remainder to go to multiple charities. The DAF can distribute the donation accordingly from there.
3 Summary
With careful planning, you can truly do well by doing good. Philanthropy and a secure financial future can both be achieved.
The best way to give to charity while saving on taxes and producing a lifetime income stream is to:
- Give appreciated stock or real estate, not cash
- Use a CRT or CGA, depending on the control you want over the funds and the way you want it paid out
- Use a DAF if you want the donation to go to multiple charities or to be spread out over multiple years
Have you benefited from high growth in the stock or real estate market?
Do you want your charitable giving to go farther?
It’s not too early to begin planning a legacy now! This has been on my mind a lot in the last several years, even though I’m only in my late 30s.
So start thinking ahead and use this strategy to benefit your charity and your financial future.
If you’re looking for more in-depth information on estate planning, I recommend reading Retire Secure by CPA and attorney James Lange.
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