The wobbly economy and plunging stock market might cause some of your clients to start thinking less about charitable giving and more about charitable receiving. But for those not lining up at the local soup kitchen, the motivation to give to deserving organizations may be stronger than ever.
Especially when would-be donors understand that the same events that have sliced the tops off of their portfolios have chopped charitable groups' finances at the knees. Here are the quickest, most efficient charitable giving strategies clients can use to get their generosity to needy groups and on the tax records before the end of 2008.
Charitable Gift Annuity
In this arrangement, the client makes a tax-deductible donation to a qualified organization. The charity then agrees to provide an income stream back to the client, starting either now, or at some time in the future. The size of the payment is based on several factors, including the timing of the payment initiation, the life expectancy of the beneficiary (or beneficiaries) of the income stream and the applicable interest rate chosen by the charity.
No matter how big or small the payment is, at least part of it is considered return of principal, and therefore not subject to income taxes. Find out more by visiting the American Council on Charitable Gift Annuities website.
Donor Advised Fund
These foundations for non-billionaires allow donors to deposit as little as $5,000 into a DAF now (and receive the inherent tax deduction), but spread the giving out over several years and to several different organizations. Larger charities may have their own proprietary donor advised fund, but clients with more than one prospective recipient may be better served by using one of the many run by financial services firms, including Fidelity, Schwab and Vanguard.
The fund companies usually offer several different portfolio options within the DAF, and also allow the donor anonymity when making a distribution to a qualified charitable organization. You can download a free white paper on donor advised funds at the site run by the American Endowment Foundation.
Buried deep in the recent bank rescue/bailout legislation was an extension of the provision that allows IRA owners over age 70½ to donate up to $100,000 from an IRA directly to a charity tax-free, even if the donors don't itemize deductions when they file their taxes.
A couple of caveats: First, the money must go directly to a qualified 501(c)3 non-profit, instead of stopping in the hands (or checking account) of the donor. Second, check with the IRA custodian to ensure they will permit this maneuver — some do not.
Despite these drawbacks, charitably inclined clients will not only avoid taxation on the distribution (or the “required minimum distribution”), but it may also help them dodge an “excess income” tax on their Social Security checks.
Stock Or Fund Shares
Clients who are still fortunate enough to have positions with unrealized capital gains should strongly consider transferring the shares to the charity instead of just writing a check. The client still gets a potential tax deduction equal to the market value of the position, but the charity can then liquidate the shares in its own account, and avoid paying any capital gains tax on the proceeds.
Avoidance of taxation is not the only benefit, as giving the shares away saves your client (and you) the arduous task of figuring out the cost basis of a stock bought several splits, spin-offs and decades ago. Odd-lot holdings are also prime candidates for donation, as doing so means you won't be on the receiving end of never-ending offers to “round up” to an even amount of shares.
Giving away odd-lot positions instead of selling them also means that your client can avoid paying your firm's minimum commission amount, which might otherwise eat up a good portion of the proceeds. The fastest way to move shares from your client's brokerage or mutual fund account is to move them electronically via the Depository Trust Company (DTC). Certificates held by the client should be sent (unendorsed) to the charity in question.
Either way (and no matter whether the charity sells the shares or not), once the shares are at the charity, the client qualifies for any potential deductions. But you should still initiate the transfer process now to make sure you finish it by the end of the year.
Of course, the easiest way to get money from a donor to a charity is to write a check or wire the intended amount into the charity's bank account. As long as checks sent via regular mail are postmarked December 31 or earlier, the client will qualify for a tax deduction in 2008. Electronically transferred amounts completed by that day qualify, too.
Speed and simplicity are not the only attributes of donating cash, as your clients can take deductions of up to 50 percent of adjusted gross income for writing a check, versus the maximums of 20 percent to 30 percent of AGI permitted by other methods of giving.
Keep in mind, though, that clients must keep written records for all deductible donations. This is especially true when it comes to cash, as the Pension Protection Act of 2006 requires that donors retain a record of the name of the charity, the date the funds were donated and the amount donated.
Having that documentation will not only help your clients in the event of an IRS audit, but if things get really ugly, it might even allow them to cut to the front of the soup line.
CFP© is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid A Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at www.advisortipsheet.com