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Financial Planning > Charitable Giving

5 Smart Charitable Giving Strategies in Uncertain Times

By Karla D’Alleva Valas

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What You Need to Know

  • Rough times can be an opportunity for advisors to bring charitable giving into their conversations with clients.
  • Giving can bring potential tax benefits and give investors a chance to support causes they care about.
  • This process can also deepen advisors' relationships with their clients.

Recent events have frayed the nerves of many investors, but it’s in times like these that advisors can truly shine. Challenging markets bring an opportunity for advisors to differentiate their service model with deeper conversations with clients about hopes, fears and purpose.

When advisors bring charitable giving into the conversation, they are not only delivering potential tax benefits, but giving investors an opportunity to support causes they care about at a time when many nonprofits are experiencing urgent needs.

Fidelity Charitable has identified five charitable giving strategies for advisors to consider when serving clients in this challenging market.

1. Select the Right Asset To Give

How it works: Consider a donation of long-term appreciated stock (i.e., held for greater than one year) to charity via a donor-advised fund in lieu of cash.

May work well for: Investors with long-term appreciated stock where the current value is significantly higher than when it was purchased.

Potential benefits: Tax benefits may include a tax deduction for the fair market value of the contribution and elimination of the capital gains tax and Medicare surtax that is otherwise incurred on the sale of the stock. This assumes all realized gains are subject to the maximum federal long-term capital gain tax rate of 20% and the potential of Medicare surtax of 3.8%. This does not account for state or local taxes, if any.

2. When Rebalancing a Portfolio, Consider Donating Appreciated Positions

How it works: Rather than selling appreciated positions to rebalance a portfolio, an investor can make a charitable gift of the long-term appreciated asset via a donor-advised fund.

May work well for: Client portfolios that have become increasingly exposed to stock market corrections or fallen out of alignment with investment goals.

Potential benefits: Investors may be eligible to take a tax deduction for the fair market value of the asset and eliminate the capital gain tax and Medicare surtax.

3. Divest Privately Held Interests via a Donor-Advised Fund

How it works: Donate a portion or all non-publicly traded held interests to a charity prior to divestiture. Note that timing is important as the donation must occur before the sale of the asset and that the donor needs a third-party independent valuation.

May work well for: Portfolios that hold a family business, S corporation shares, or limited partnership interests. Other assets that may be non-publicly traded include cryptocurrency, restricted stock, and some alternative investments.

Potential benefits: Not only is it possible to minimize capital gains exposure under this strategy, but it may also allow for a tax deduction for the current fair market value of the donated assets, rather than the original cost basis that a private foundation must use.

4. Elect Charitable Contributions to Offset a High-Income Year

How it works: A “bunching” strategy may reduce taxable income. By frontloading multiple years of charitable giving in one year, it may allow them to surpass the itemization threshold and then elect the standard deduction in subsequent years.

May work well for: Clients on the threshold of a higher tax bracket or with higher income than expected in the future, especially for a unique event (e.g., a financial windfall or work bonus) that is not anticipated to repeat.

Potential benefits: This strategy can reduce taxable income in a given calendar year. When paired with a donor-advised fund, it establishes a charitable “nest egg” that can grow tax-free and support giving now and in the future.

5. During Roth Conversions, Offset Increased Taxable Income With a Charitable Contribution

How it works: When a client’s Roth conversion triggers a taxable event, a charitable gift in the same tax year may offset taxable income.

May work well for: This approach is well suited for those with long investment timelines (over five years) and those who expect higher taxes in the future. (Keep in mind that if you are considering making a qualified charitable distribution (QCD) from an IRA account, remember that some charities are not eligible recipients. This includes donor-advised funds, private foundations and supporting organizations as described in IRC Section 509(a)(3).)

Also look for clients who have inherited an IRA and must withdraw the assets within 10 years of the death of the original account holder.

Potential benefits: The charitable deduction can offset the increase in taxable income triggered by the conversion.

What is a donor-advised fund? A donor-advised fund is like a charitable investment account for the purpose of supporting charitable organizations. Contributions to a donor-advised fund are generally eligible for an immediate tax deduction. Those funds can be invested for tax-free growth, while allowing donors to support charities on their timetable.

Advisors are in a key position to provide the calm perspective and peace of mind that so many investors are searching for during these uncertain times. By incorporating charitable giving into planning conversations with your clients, you not only deepen those relationships, but also demonstrate that you recognize and appreciate their personal goals and values.

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