Know the importance of charitable giving in financial planning

As you consider the individual components of financial planning with your clients, charitable giving may be a vital component of your clients’ estate plan. It not only supports the causes that they care about but can also offer the potential for significant financial benefits. This article helps you to incorporate charitable-giving estate planning strategically, so you can help clients achieve their philanthropic goals while also optimizing their financial outcomes.

Strategies for maximizing financial benefits

To help your clients maximize the financial benefits of a charitable giving plan, consider these strategies:

Timing the gift

How donors time their gift can significantly enhance its impact. For example, if a client of yours has a particularly high-income year, gifting a portion of that income to charity can help maximize tax deductions. Additionally, staying informed about macroeconomic and regulatory changes can help you provide guidance on timing the gift effectively. For example, if there’s an anticipated increase in capital gains tax rates, gifting appreciated assets before the rate change can save your client a substantial amount in taxes. The CARES Act temporarily raised the income limit on deductibility to 100% of adjusted gross income (AGI), and cash contributions can currently be deducted up to 60% of AGI, reverting to 50% in 2026. This temporary increase can be leveraged to maximize tax benefits.

Choosing what type of asset to gift

The type of asset gifted can also greatly influence the financial benefits of philanthropic planning. Gifting appreciated assets, such as stocks or real estate, can help avoid capital gains and transaction costs associated with a sale. For example, if a client has held a stock for several years and it has significantly appreciated, gifting this stock to a charity can provide a full tax deduction for the fair market value of the stock, while the charity can sell the stock without incurring capital gains tax. Donors can deduct the fair market value of the asset, up to 30% of their AGI, and avoid capital gains tax on the appreciated value. For instance, donating appreciated stock that doubled to $10,000 in value can save $750 in capital gains tax, versus selling the stock and donating the proceeds. Rather than selling shares to generate a cash donation, a strategy of gifting shares, in-kind, to the charity will avoid a capital gains tax that would have resulted from the sale. This strategy can be especially beneficial as a way to offset tax liability in high-income years.

Method of gifting

Also consider the method of gifting, as it, too, can play a crucial role in the maximizing benefits equation. Donor-advised funds (DAFs) offer flexibility and control over the timing of donations. For instance, a client can contribute to a DAF in a high-income year and take the tax deduction immediately, while the funds can be distributed to charities over time. This strategy can be particularly useful when the standard deduction is high, as it allows clients to bundle donations and maximize their tax benefits. Donor-advised funds also provide simplified administration, lower costs compared to private foundations, and the potential to grow the donated assets for ongoing charitable support.

Private foundations, while more complex, provide even greater control over the charitable financial planning process. For example, a client with a substantial estate might establish a private foundation to manage their charitable giving and ensure their legacy continues for generations.

Charitable lead trusts (CLTs) and charitable remainder trusts (CRTs) are powerful tools for combining charitable giving with estate planning. A CLT can be used for income-producing assets, providing a stream of income to the charity for a set period, after which the remaining assets return to the donor or their beneficiaries. For example, a client with a highly appreciated piece of real estate can place it in a CLT, generating income for a charity for 10 years, after which the property can be sold and the proceeds returned to the client’s heirs, potentially reducing estate taxes.

Qualified charitable distributions (QCDs) from IRAs are another potentially effective strategy. For clients over 70.5 years old, QCDs can be directed to charities, avoiding the inclusion of required minimum distributions in taxable income. For example, a client who is required to take a $50,000 distribution from their IRA can direct $20,000 to a charity, reducing their taxable income by $20,000.

Additional consideration—bunching charitable contributions

Bunching charitable contributions, or consolidating several years’ worth of donations into one year, can enhance tax benefits. With this strategy, a taxpayer can exceed the standard deduction threshold and itemize deductions. This strategy is particularly useful in high-income years or when tax laws are favorable. In subsequent years, the taxpayer can take the standard deduction, which may be higher due to inflation adjustments or other factors. This approach maximizes the tax benefits of charitable giving over the span of multiple years.

Building a charitable giving plan

When building a charitable giving plan for clients, it helps to focus on the following elements:

• Understanding your clients’ goals.
• Educating your clients.
• Providing your clients with options.

Understand your clients’ goals

What’s the emotional driver for your client’s interest in charitable wealth planning—what motivates your clients to give? What are their personal financial objectives, and why? Understanding the underlying reasons for your client’s philanthropy, along with their overall estate planning goals can help you guide them more effectively to serving both. For example, a client might be passionate about environmental causes and also might be looking to reduce their estate tax burden. By aligning the charitable giving plan with their tax-minimization goals, you can create a plan that’s both meaningful for them and financially sound.

Educate your clients

Emphasize to your clients the potential tax savings and other financial benefits of these strategies is essential. For instance, explaining how a CRT can provide an income stream while also supporting a charity can help your client see the dual benefits of the strategy. Additionally, highlighting the positive impact on the chosen charities and the community can reinforce the client’s commitment to charitable planning. For example, a client might be more inclined to gift appreciated securities if they understand that this can avoid capital gains tax, provide a larger tax deduction, and help one of their favorite causes.

Provide your clients with options

Presenting a range of gifting options can help your client make a more-informed decision. For example, a client might be torn between a DAF and a private foundation. By explaining the pros and cons of each, you can help your client choose the philanthropic financial planning option that best fits their needs. Customizing the plan to their unique situation and preferences is key to plan success.

Follow up

To ensure the plan remains aligned with your client’s evolving needs and goals, conduct regular reviews and gather feedback. For example, if a client tells you their financial situation has changed, you can adjust the plan accordingly. Encouraging clients to provide feedback on the impact of their gifts can also help build a stronger relationship and ensure the plan continues to meet their estate planning and charitable giving objectives.

By following these steps, you can help your clients create a charitable giving plan that is both meaningful to them and tax efficient.

 

Notes:

• All investing is subject to risk, including possible loss of principal.
• Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
• Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal adviser about your individual situation.

Review our Estate Planning page for more resources.