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Charitable Planning Strategies: Are You Leaving Your Money to People, Charities, or the IRS?

October 23, 2023 – On today's Lifetime Planning segment, Financial Sense Wealth Management's Crystal Colbert and Aaron Weigman discuss various charitable planning strategies that can maximize the tax benefits from giving to the people and charities you love instead of the IRS. Aaron notes a concerning trend of declining total charitable giving and emphasizes the importance of considering both short and long-term impacts when making charitable donations. The discussion delves into practical considerations, such as cash limits, and explores the benefits of using appreciated stock for charitable giving, including its impact on reducing adjusted gross income.

Additionally, Aaron and Crystal cover innovative methods like gifting a life insurance policy, utilizing donor-advised funds to maximize the impact of charitable contributions, or utilizing beneficiary designations through an IRA for charitable gifting. Also briefly discussed, Aaron and Crystal look at the distinction between charitable gift annuities and charitable remainder trusts, providing listeners with insights into selecting the most suitable option for their charitable endeavors. The concept of bunching strategy, an effective way to optimize deductions in a certain year, is also discussed. Overall, this podcast offers a comprehensive overview of diverse charitable planning strategies, empowering listeners to make informed decisions in their philanthropic endeavors.

To speak with Crystal, Aaron, or any of our wealth advisors, feel free to Contact Us online or give us a call at (888) 486-3939.

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Aaron Wiegman: Welcome, everybody, to today's episode of Lifetime Planning. I'm Aaron Wiegman, and with me is Crystal Colbert. To talk to you a little bit today about charitable planning options, strategies, things that you can wind up employing for both here and now and maybe 2023 or in the future as you wind up putting together your overall planning strategies for the future. So, Crystal, welcome.

Crystal Colbert: Thank you. So I know we kind of wanted to just dive right in to figure out what we can do in the here and now and in the future. So what are some of the first questions you should ask yourself and address when it comes to charitable planning?

Aaron Wiegman: When you wind up looking at charitable planning and charitable giving as a whole, you look back on the Tax Cuts and Jobs act from a few years ago, and there are some changes that were employed there, but it's interesting to see kind of like the growth of charitable giving. But last year, there was actually a little bit of a decline in charitable giving. The total amount that was given last year was about $499,000,000,000, which is a great amount of money, but that's actually declined in 22. It was a 3.4% drop from the year before. I guess that's not so unsurprising, given the economic challenges and the stock market that had pulled back, because some of those charitable giving strategies might be in tune with people having a lot of stock market gains.

Aaron Wiegman: I guess when you wind up looking at it, if there is a rebound to the market, some of the economic challenges that people might be going through right now, if that improves, at least that's a good baseline to help improve the giving community as a whole. So I guess as an individual who's trying to consider if charitable planning, charitable giving is the right kind of thing that I want to employ into my financial plan. A couple of questions that I might ask are, what do I actually care about the most? Right? What kind of an impact do I want to make?

Aaron Wiegman: What's important to me, if you wind up looking at the charities that people wind up giving to the Most, the number one winds up being whoever their religious community winds up being, and then it could be the American Heart association or it's the Humane Society or whatever it is that you care about the most, you can figure out a way to help them out and maybe help yourself out, too, if you wind up incorporating that strategy smartly. So do you want to give it now, or do you want to give it in the future? So I guess that's a matter of where you want to see the impact a lot of times when you wind up seeing that happiness quotient that people have, they like to see the impact that it makes now. Right. So see those dollars actually be putting to use into something that is tangible and they can actually see it impact the lives of whomever it is that they wind up giving it to.

Aaron Wiegman: Right. At the same time, there's a lot of planning strategies around giving that money for the future. So whether that be your own estate plan, what have you, those charities are going to be dependent on your dollars if you're giving it in the here and now, and they're going to be dependent on those dollars if you wind up passing away. So it's kind of like that income stream. They're depending on you as a donor as well.

Aaron Wiegman: Do you want to make a short term impact or long term impact? Right. So there's those strategies where if you're just giving cash today, of course it's a short term impact that's going to help out whatever that charity is. But the long term impact of seeing what that can do, setting up kind of a long term strategy to make sure that those dollars are going to be there this year, next year and in the future, that really helps whatever that charity is with their long term planning. Right.

Aaron Wiegman: And of course, what assets do you have to give? That is an important thing. So is that just coming straight out of your income today? Do you have particular assets that you could be giving to a strategy, giving to a charity that would help them today or in the future? And what kind of strategies do we put around that?

Aaron Wiegman: So I've said strategy a lOt, I.

Crystal Colbert: Think, already, but it is, it does come down to strategy. You have to think of it that way because when it comes to your budgeting and it comes to your finances, there is a strategy in place. So what are some ways to give now and how will that help your financial picture just in general?

Aaron Wiegman: Right. So you think about, okay, the easiest way that people wind up giving money is I'm going to give cash to said charity. There's someone ringing a bell on the sidewalk. You're about to see that with the Salvation army quite a bit coming up here with the holiday time. But if you are going to be giving cash, you also have to think about your strategy.

Aaron Wiegman: Am I itemizing my taxes every year? Because you may not. Over the last couple of years, I think it was $300. You could wind up giving and still getting a write off. But this last year you didn't get that.

Aaron Wiegman: This year you're not going to get that that was something that came up through the COVID pandemic time. But when the tax changes happened and they increased the standard deduction, that removed about 46 million taxpayers that were itemizing before. So if you are doing something in the here and now and you want to see that whatever charitable contribution it is that you're making, you have to coordinate that with your taxes, too. So if you're just giving cash, you may be surprised that you have to get above that. For a single person, $13,850, or a married couple, that $27,700, or you're just going to wind up taking the standard deduction anyways.

Crystal Colbert: Right, exactly.

Aaron Wiegman: Cash is good, and the charities will appreciate that. It's just a matter of what kind of an impact that's going to make on your taxes, unless maybe you do something differently or smartly on them. So, cash, you can give up to 60% of your AGI in a given year.

Crystal Colbert: And if you don't know what that number is, you should probably look at your last year's tax return just to give you a ballpark estimate of what that might look like for this year.

Aaron Wiegman: If you want to make a big cash contribution to something, that is the limit as far as how much you can wind up giving in one particular year. Right. That can actually carry over. So if you give more than that, that can actually carry over up to five years if you want to, but you're going to be limited with that 60% appreciated stock that you can also give. Right.

Aaron Wiegman: So if you're sitting here looking at your portfolio and you say, I bought that particular stock ten years ago, now, it's appreciated quite a bit. I don't want to sell it, but I do need something to give to a charity. You could give that stock directly to said charity, and that would give you a 30% reduction in your AGI.

Crystal Colbert: Yes. And it's so much better to give it directly to charity, because if you do sell it, then you are the one responsible for paying the taxes on those long term capital gains. So it really is best just straight give it to the charity, they don't have to pay the taxes. Wonderful strategy to put in place.

Aaron Wiegman: Right. So, A, you don't have to pay the taxes on it, and then B, you get a deduction for actually giving it to the charity.

Crystal Colbert: Yeah, exactly. And what are some of the other assets that you can give to charity now?

Aaron Wiegman: Real estate, right? I mean, real estate is going to be one of those. If you have the home, it's appreciated considerably. Some commercial property or land or something like that. Now, giving that property, of course, if you were to give that to family, the next generation, they are going to get a step up in basis with something like that.

Aaron Wiegman: But if it's one of those things where you would want to see that impact in the here and now, real estate could be a little bit tricky, too, because there's only certain charities or community foundations that might be able to accept that kind of a gift and be able to deal with it. But I mean, if you think about reasons to actually give property, there's no more real estate taxes, no more cost of ownership. You don't have the hassle of selling it. If it's unproductive land, maybe it could be put to use or sold or something like that. You could gift the house that you're in right now and still be able to live in it until you wind up passing away.

Aaron Wiegman: So there's different ways that you could wind up doing something like that along with that. Get the question? Quite a bit of what do I do with this crypto? Right. That's obviously been more popular in the last few years, and I think some charities are equipped to handle that.

Aaron Wiegman: Some aren't equipped to handle know, I guess it depends on the popularity of how many gifts they're giving or receiving from the general population who's gifting crypto in general. But some of them are set up. So, for instance, like the American Heart association, they do have the capabilities of taking on things like that. So if you did have some crypto and you did want to give it to them, instead of selling off some highly appreciated stuff that you got from a few years ago, that's an opportunity for you as well. Just as well.

Aaron Wiegman: Life insurance. Maybe you have a life insurance policy that you don't have any use for at this point in time. But maybe you've been gifting to a particular charity, and maybe it makes sense for you to gift that policy to the charity so that when you pass away, the charity does still get a death benefit from you. Of course, it's tax free, just like it would be to anybody else, but it would be a larger lump sum to go ahead and continue on with their loss of income if you wind up passing away. So that's another interesting thing.

Aaron Wiegman: And then we're going to get into it a little bit, like further down the road, too. But there's donor advised funds, right? So that's a way for you to be able to gift, whether it be highly appreciated stock or real estate or crypto or things of that sort to be able to put it into a fund, you wind up getting that tax deduction on the front end. That donor advised fund could be something that you want to make an impact now, or you want to have that grow tax free inside of that fund, and you can manage the assets inside of the fund, or use your advisor to manage the assets inside the fund, and then you can wind up using that as kind of your own little charitable foundation for things going forward, and you can wind up giving the money out. It doesn't have to be a one time kind of a thing.

Aaron Wiegman: It could be an annual thing if you wanted it to.

Crystal Colbert: Exactly. And the nice thing about the donor Advice Fund is if you don't know exactly what charity you want to give to now, but you do want that tax deduction, you can at least gift it to the donor Advice fund and then come up with where it's going to go later.

Aaron Wiegman: Right. So it's a very useful tool. So one of those things that probably need to talk to an advisor or work with whoever that charitable foundation or charity is.

Crystal Colbert: So if an individual isn't interested in gifting right now, how can they set themselves up to give later?

Aaron Wiegman: Yeah, I guess when you wind up looking at your estate plan, you have three choices of who you're going to give your money to in the future, and that's going to be the people that you love, the charities that you love, or the IRS. So if you want to focus on those first two, those are things to consider as you're looking at your estate plan. Right. So just simply put, a lot of times you wind up seeing inside of a will or inside of a trust, there's a little bit of a carve out that says, I want to give X amount of dollars to these specific charities. Right.

Aaron Wiegman: And that may or may not be the most efficient way to do it, but at least you can carve out something to say, I want 10% of my estate to go to this charity, or I want $100,000 specifically to go to that charity. And so that's one way you can wind up doing it. The other way is when you wind up looking at just specific beneficiary designations, whether it be on an investment account, if that winds up being an IRA, or if it's a Roth, or if it's a life insurance policy, or if it's whatever it is that's going to have that beneficiary designation. I guess when you wind up looking at who you wind up leaving as a beneficiary of which accounts try and think through who it's going to have the biggest impact on. So I always give the advice, if you are going to be giving some money through a beneficiary designation and you want to do something like that, do that with an IRA.

Aaron Wiegman: Right. Because if you're giving your kids, say, the Roth IRA or life insurances or some sort of taxable investment that's going to get up, step up in basis, those are going to be tax efficient for them. Whereas the IRA itself, the traditional IRA, the 401K, things like that, that's going to be the most tax inefficient to give to the kids.

Crystal Colbert: And the charity never has to worry.

Aaron Wiegman: About paying tax, don't have to worry about it.

Crystal Colbert: So the IRA is the perfect one to gift from if you're going to do anything. I completely agree.

Aaron Wiegman: Charities don't have to worry about that new Secure Act 2.01.0 to be able to take the money out in ten years and stretch it out. None of that stuff applies to them. So go ahead. If you're going to be giving money in any shape or form, that's a really great way to do it.

Crystal Colbert: Yeah. So definitely, if you haven't gone over your beneficiaries with your advisors or looked at your beneficiaries recently, take a look and make sure it's appropriately right.

Aaron Wiegman: Some of the other things that you can do, I mean, there's more complicated kind of things to be able to give funds to, especially if you want to receive some money in the here and now or see some sort of impact on your financial plan. So things like a charitable gift annuity. So that's the same kind of thing where you wind up getting that upfront deduction and you can actually receive income while you're living a portion of that, depending on what the basis is and whatnot, you're going to receive a portion of that. It could be tax free income to you as well on a portion, but then the charity winds up getting the remainder of that same thing. Kind of goes with a charitable remainder trust.

Aaron Wiegman: So you can give highly appreciated things into the charitable remainder trust, receive some income during your lifetime, and then the charities wind up receiving as the beneficiary at the end of it. Right. So some different things that you can get to the here and now and a little bit of the future benefit as well.

Crystal Colbert: So what are some strategies to look into when it comes to charitable planning?

Aaron Wiegman: So we talked about a lot of stuff already. Right. So I guess as you're looking at your financial plan and you're thinking about, well, that donor advised fund thing. That sounds pretty interesting. What if I gave a bunch of money to that donor advised fund this year, and maybe it was because of the standard deduction?

Aaron Wiegman: It's kind of hard to get above that standard deduction. And so if you think about it, maybe there's what they call, like, the bunching strategy. So if you do wind up gifting a bunch of money and you take advantage of that standard, well, the itemized deduction, because you give a larger amount in one particular year, maybe that winds up making sense. So maybe you give, like, three years of contributions into that donor advised fund in one particular year. So you can get that itemized deduction, take full advantage of it, and really have that make sense for you, and then you can have that carry forward.

Aaron Wiegman: That could even be up to five years. So I think that makes a lot of sense. And even if you're doing something like that, sometimes what people wind up looking at is doing a combination, or even if they don't do it, a donor advised fund, a combination of cash and some sort of stock, because the cash has a higher deductibility on it, whereas the stock only has the 30% versus the 60%. So it's kind of a combination of those two things. And then if you look at, as people are doing Roth conversions because they're trying to figure out what my tax diversification looks like in the long run, as I look at my retirement strategies, sometimes they really like the idea of taking their money that's in a taxable traditional IRA, 401, things like that, and they move it into a Roth IRA.

Aaron Wiegman: Well, in order to do that, they have to pay taxes on it, and they're going to be paying ordinary income on that. So if you can coordinate your charitable gifting strategy in the same year that you wind up having that conversion happen, well, maybe those can help each other out. Right. So you're not going to have to pay as big of a tax hit when you wind up making that conversion because on the backside, you're making that charitable contribution.

Crystal Colbert: Exactly. And to your point, just to add to one of the strategies, if you didn't need the money, right. And you're required to take your required minimum distribution and you still want to do a Roth conversion on top of it, maybe instead do a qualified charitable distribution where it counts towards your required minimum distribution so it offsets the taxes that you would have to pay on income for your required minimum distribution, and then you get to do your Roth conversion as well.

Aaron Wiegman: Yeah. So let's talk about that. So the qualified charitable distributions, I think that's probably one of the more popular things these days that people are taking advantage of. So you're right, I don't necessarily need the required minimum distribution that I have to actually take out. Now if you turn 73 this year, you have to take it out this year, you qualify for it.

Aaron Wiegman: But for a lot of folks, they don't necessarily need it. And qualified charitable distributions, you can start doing that at age 70 and a half. So what's kind of nice about that is that it's not going to qualify against you for IrMa or any of the Medicare taxes. And it's one of those things that you don't have to itemize to basically take advantage of it. Right.

Aaron Wiegman: So it's an easier way for you to do some sort of charitable gifting. It's very efficient. You just give it straight from that IRA and it never actually hits your taxes.

Crystal Colbert: Exactly. And you can gift up to $100,000 from your IRA to qualified charitable distributions. So that's your way. And you turn 70 and a half and you want to start doing that, take it from your IRA versus taking it from, like you said earlier, a taxable account or a Roth IRA.

Aaron Wiegman: Yeah, we've had those conversations quite a bit. Whereas, yes, I do wind up giving, maybe it's even just a small gift, but it winds up making much more sense if you're giving smaller gifts or bigger gifts directly from the IRA itself. I guess you would have those conversations with folks if they are making bigger gifts, whether or not it would make sense to have it come from the IRA or from somewhere else. But it's a very simple, efficient way to have the money come out of the IRA itself and not have to pay taxes on it.

Crystal Colbert: Absolutely. And what are some of the other ways, some of the more complex ways.

Aaron Wiegman: To know right now, as you wind up going throughout the year, a lot of times people wind up rebalancing. And this year was a little bit of a bigger year when it comes to, I guess, some person's individual gains, that's going to fluctuate. Right. So as you're rebalancing your portfolio, and if it's holding you back from rebalancing your portfolio, because you are going to have particular gains in the portfolio, maybe incorporating some sort of charitable gifting strategy of those highly appreciated stocks, maybe that's something you incorporate. So it kind of like offsets what that rebalancing tax hit would be.

Crystal Colbert: Yeah. And actually one of the coolest strategies. And we've done it before in the past. But where they actually set up a charitable gift annuity in the year that they're selling their business. So in the year that you sell your business, you're looking at a fair amount of income coming due in that year.

Crystal Colbert: So by offsetting a bit of the tax hit with a charitable gift annuity, it's a really great way to do some charitable giving and offset some of your taxes.

Aaron Wiegman: Yeah. So selling that, I guess that is like those windows right before you retire and you're planning for retirement, front loading those gifts on the front end when you're in one of those highest tax bracket years, if you're selling a business or, I mean, a lot of times right before you wind up retiring, it is one of those highest tax bracket kind of years. Right. So if you can coordinate some of that charitable gifting strategy right there, go ahead and do that. And then that next year, like you said, it's going to be a lot easier for maybe to roll into some of those Roth conversions or something like that.

Crystal Colbert: Exactly. And it doesn't have to be a super complex way you can set up a donor advised fund. Keep in mind, the 60% of your AGI is what you can deduct in that year. But if you front load some of that donor advised fund with some of your highest earning years towards the end of retirement, then you can give it out year by year in retirement and still give to those charities that you love so much but have a nice chunk of change in that fund.

Aaron Wiegman: Yeah, I guess the nice part. So for clarification, you only get the tax break on the front end when you're gifting the money once it's in the donor advised fund. Any gifts that you make out of that, you don't get an extra gift on that. No, but you already have that basically set up for those future gifts. Right.

Aaron Wiegman: And you get the tax break once.

Crystal Colbert: Exactly. So what are some good resources to use if you want to start your financial planning journey into charitable planning?

Aaron Wiegman: Sure. I guess, number one, look at the charities that you would want to support. Right. And see how they prefer getting their money. Maybe they already have resources that you can reach out to and give to them specifically.

Aaron Wiegman: But if you have multiple different charities, maybe you need to look at some of the resources from the custodians that you work with. So the fidelity's the Schwabs, the vanguards of the world. They all have their own charitable resources there. They all have their own donor advised funds, things like that. That you can work with, but then think of different community foundations, too.

Aaron Wiegman: Right? So there might be places in your community. Here in San Diego, we've got the San Diego foundation that can help us out, coordinate those gifts or accept things like real estate or some of the more complicated kind of stuff and really kind of put together a giving plan for you in place if you want to get connected to charities that you can make an impact with.

Crystal Colbert: What was really cool about the San Diego foundation is they actually set you up with somebody who will analyze how you want to give. So maybe you don't know exactly what charity you want to give to, but they'll actually figure out what is meaningful to you and kind of help you decide on what charities to give to if you don't know.

Aaron Wiegman: And working with a foundation like that, they'll screen and they'll make sure that they're giving the money to a legit 501. That I know in the past, especially for retired folks that wind up getting hit up with a lot of different scams and such like, I've seen that before, where they wind up getting hit up by someone who's not a legit with 501 and they're asking for money. And so, I mean, you got to be careful with who it is that you're giving the money out to just to make sure that it's legit. Right. And so working with some of these foundations, or if it is the charity themselves, the larger ones, the American Cancer Society and the American Heart association, things like that, they're going to be able to help you out with that a little bit more specifically.

Aaron Wiegman: And just as well work with the advisor that you have. Right? Because some of know goes hand in hand with what your retirement plans are going to be looking like, your financial plan, the estate planning, your taxes on a year to year basis. So incorporate your financial advisor, your tax advisor, to make sure that you're making smart uses of this money and coordinating that properly.

Crystal Colbert: So, Aaron, thanks for all this information. This was wonderful. If somebody wanted to get in contact with you to find out more, how can they get in touch with you?

Aaron Wiegman: Certainly reach out to me here at the office. It's 858-487-3939 and you can always reach me at Aaron[dot]Wiegman[at]Financialsense[dot]com and if you do like this topic, the resources that we've got here for you, too, Crystal, you're also a nice resource. How can someone get a hold of you?

Crystal Colbert: Yes. So you can contact me at that same number, 858-487-3939 and just ask for Crystal Colbert. Or you can email me directly at Crystal Colbert, Crystal[dot]Colbert[at]Financialsense[dot]com.

Aaron Wiegman: Yeah, so if you liked what we had to talk about here, if you know anybody who could benefit from hearing this podcast, please do share it with them just so they can reach out to us as a resource or like any of these other topics that we've had here. So appreciate your time and looking forward to seeing you next.

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