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In the realm of philanthropy, strategic charitable gifting offers a pathway for your clients to align their financial goals with their desire to make a difference in the world. By employing a combination of strategic planning for long-term objectives to address immediate tax concerns your clients can amplify the impact of their charitable contributions while supporting causes close to their hearts. Let's explore five key strategies that allow individuals to optimize their charitable giving for planning and impact.

1. Utilizing Employee Stock Options (ESOs):

Employee stock options (ESOs) present a unique opportunity for charitable giving. By exercising ESOs and donating resulting shares to charity, your clients can potentially benefit from tax advantages similar to donating appreciated stock, thus avoiding capital gains taxes and potentially qualifying for tax deductions. Additionally, transferring ESOs into charitable trusts like Charitable Remainder Trusts (CRTs) enables individuals to sell stock within the trust, providing income for beneficiaries before assets are distributed to charity.

Before beginning any inquiry into whether a client should donate a stock option, they must review the terms of the stock option plan or agreement to determine whether a transfer of the option itself is possible. There are different types of stock option plans, and their rules are different.

2. Qualified Charitable Distributions (QCDs):

Individuals who are 70 ½ years and older and who have a traditional IRA are eligible to make a Qualified Charitable Distribution (QCD). This is a tax-free gift arrangement made from their IRA directly to the causes they care about. Your clients who meet the age requirement can donate up to $105,000* annually from their IRA without having to include the distribution in their taxable income. It’s a powerful way to give that benefits both your client and the charities they wish to support.

For clients aged 73 and older, leveraging Qualified Charitable Distributions allows them to direct a portion or all of their annual Required Minimum Distribution (RMD) from their retirement accounts directly to charity. This strategy supports charitable causes and helps individuals avoid income tax on the distribution.

Thanks to the Legacy IRA Act, individuals who are 70 ½ or older can now create a Charitable Gift Annuity with a one-time, tax-free Qualified Charitable Distribution of up to $53,000*. This strategy allows individuals to bypass income tax liability on the transfer and provides a dependable lifetime income stream.

*Indexed for inflation

3. Direct Gifts to Charities:

Direct gifts represent straightforward yet impactful estate planning techniques, whether during your client’s lifetime or through their will. Many charities accept a wide array of assets including cash, appreciated stock, insurance, and much more. For your clients who are looking to downsize, donating assets to charity that are no longer used – such as vehicles, art collections, and real estate – can be a strategic way to make an impact on the causes they care about during their lifetime while enjoying benefits in return. No matter when the gift is made, direct gifts to charity allow your clients to support the causes they care about and sometimes allow them to make a bigger impact than they thought possible.

4. Donor-Advised Funds (DAFs) and Private Foundations:

Donor-advised funds (DAFs) offer a streamlined approach to charitable giving, providing immediate tax deductions and opportunities to manage charitable contributions over time. To establish a donor-advised fund, your client makes an irrevocable contribution, which could include cash, stock, real estate and more, and receives an immediate tax deduction. As soon as the donor-advised fund is established, your client can recommend grants to charities at any point in the future. Any investment growth is tax-free, giving your clients the potential to maximize their impact.

The final distribution of contributions remaining in a donor-advised fund after the owner’s lifetime can also be designated to charity(ies), creating an opportunity for your client to make a legacy gift and leave a lasting impact on the causes they care about for generations to come.

For those with greater resources, establishing a private foundation provides flexibility and control over charitable endeavors. With this flexibility and control comes greater administrative duties and oversight. A private foundation offers many of the same benefits as a donor advised fund. There is a mandatory yearly distribution of 5% from the foundation as well as investment management and tax return preparation. The private foundation tax return is also available for public review as opposed to the donor advised fund, which is not.

5. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs):

Planning a gift to charity through a trust is a simple way for your clients to support the causes they care about while receiving tax benefits in return. Charitable trusts are structured in such a way that makes the trust exempt from income taxes. There are two main types of charitable trusts, each with several subtypes.

A Charitable Remainder Trust (CRT) allows individuals to contribute assets to a trust, receive partial tax deductions, and provide income streams to beneficiaries before assets are distributed to charity at the end of the trust term.

Charitable Lead Trusts (CLTs) work in reverse of CRTs, allowing individuals to support causes today and provide for their loved ones later. In this arrangement, an individual transfers cash or other assets to a trust that makes payments to a charity for a period of time. When the term ends, the remaining assets pass to the individual beneficiaries selected.

Strategic charitable gifting within estate planning presents a win-win opportunity for your clients and the organizations they are passionate about supporting. By leveraging various techniques, individuals can maximize the impact of their philanthropic endeavors while achieving their financial goals. In summary, strategic charitable gifting can allow your clients to utilize tax advantages and create a lasting legacy for future generations all while supporting vital charitable causes they care about.

About the Author

Ashley Folkes, CFP®, CPWA®, CRPC®, RICP®, CEPA
Founder - Managing Partner / Senior Wealth Manager Inspired Wealth Solutions

Ashley Folkes holds the CFP®, CPWA®, RICP®, CRPC®, and CEPA designations and is a seasoned professional with over two decades of experience in private wealth management, financial planning, portfolio management, and estate planning. He is located in Birmingham, Alabama.