Spokane Journal of Business

Careful giving strategies can have tax advantages

Planning helps optimize donation timing, structure

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Mary Lago is a certified financial planner and a principal and wealth management chair for Ferguson Wellman Capital Management, which serves individual and institutional clients throughout the West.

A carefully developed charitable-giving strategy empowers individuals and families to support meaningful causes, while also benefiting from tax advantages.

An important place to start is to consider the area or areas you want to impact, such as mental health, access to the wilderness, or perhaps music in schools. The next step may be exploring organizations with aligned missions to learn about their strategies, stewardship, and opportunities for philanthropic investment. Finally, a detailed evaluation of your financial resources and circumstances can help identify the size, timing, and nature of charitable gifts that will both support your goals and offer the greatest tax benefits.

We expect to see several trends in philanthropy in the year ahead. Specifically, donor-advised funds, which allow donors to bunch multiple years of charitable gifts into a single tax year while spreading out the ultimate gifts to charitable organizations, are likely to continue to increase in popularity. Also, direct gifts to charity from an individual retirement account, known as qualified charitable distributions, will remain a useful option for tax filers who don’t itemize deductions or are otherwise maxing out their charitable deductions. Charitable remainder trusts which provide a deferred gift to charity and a current stream of income to the donor or another individual, will regain their popularity as interest rates increase. Perhaps less of a trend, but in Washington, we may also see charitable gifts structured to mitigate the new capital gains tax.

Let’s explore why each of these strategies may have momentum.

DAFs could be described as an investment account dedicated to funding charitable organizations. By establishing a DAF and designating these funds for charitable purposes, donors have the ability to time their charitable deductions to maximize the tax benefits of their donations. Controlling the timing of donations often results in “bunching,” where donors can combine several years of gifts into a DAF in a single tax year—yet distribute the funds to charities in subsequent years. 

There are significant tax savings that come from the ability to use long-term appreciated securities to fund the DAF account as donors can eliminate the capital gains tax that would be due if they sold those assets in their personal accounts. Anyone who owns appreciated securities and makes cash contributions to charities should be considering a DAF fund.

Many DAFs also have the option of including family members as current or future advisers, allowing donors to engage future generations and establish a legacy of philanthropic giving beyond their lifetime. Allowing younger family members to influence the selection of charitable recipients can be a powerful motivator for inspiring future generations to think philanthropically. This feature, along with streamlined recordkeeping and preferable tax treatment, has caused many families to use DAFs rather than private family foundations. For all these reasons, we believe DAFs will continue to expand in use.

Another option for philanthropically inclined individuals is qualified charitable distributions. By structuring these gifts to be paid directly from individual retirement accounts, the donor avoids realizing the taxable income on the distribution.

Qualified charitable distributions generally will be most advantageous for those who aren’t itemizing deductions on their tax returns and who are subject to required minimum distributions. Starting this year, the beginning age for required minimum distributions increased to age 73 and will increase again in 2033 to age 75.

In a nutshell, charitable remainder trusts can offer a current income tax deduction for a future gift to charity. Additionally, these trusts create a stream of income while deferring the realization of capital gains on the sale and diversification of appreciated assets, such as stocks or real estate.

The charities benefit by receiving the remainder of the assets at the conclusion of the trust terms, and the amount of the upfront charitable deduction is based on this projected amount. Because these projections incorporate assumed growth rates tied to current interest rates, the rising interest rate environment will further increase the tax benefits for donors.

Well thought-out charitable giving strategies give donors opportunities to support organizations doing great work in our communities as well as gain meaningful tax advantages. Knowing the tax implications in advance can help you optimize the size, timing, and structure of your gifts for maximum tax benefit. 

Coordinating with tax, legal, and financial professionals is the best way to identify opportunities and secure the best outcome.

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