Strategies Your Clients Can Use Right Now

It may seem too early to talk about year-end planning. But the 2017 Tax Cuts and Jobs Act set many changes in motion for charitable giving. Whether a clients’ charitable giving stems from a concern for those who are less fortunate, the desire to support a particular cause, or an endeavor to gain recognition in their community, the changes to the income tax deductions will likely impact the charitably inclined.

The increase in the standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples) means far fewer people will itemize (a requirement to obtain the charitable deduction). Additionally, the $11.18 million estate tax exemption per person means far fewer people have taxable estates now than before the act came into effect. Because of the general reduction tax in tax liability after the Tax Cuts and Jobs Act, charitable planning no longer has the same tax-saving benefit it once did.

Even against these headwinds, there remain actionable solutions you can implement with your clients to maximize their charitable giving results. When you share these solutions with charitably-minded clients, you enhance the value you provide and deepen your relationships.

1. Bundle Gifts Together
When your clients make relatively small gifts each year, there often isn’t enough to make those gifts tax deductible. That’s why it’s helpful to bundle gifts so the amount becomes deductible in one year. For example, if a client gives $10,000 per year, they can instead give $30,000 in one year and inform the charity that the gift is for three years. This way, the client is “prepaying” three years of annual gifts. Utilizing this larger amount, the client can now obtain the income tax deduction for the one year that the gift is made.

Another option is to use a donor-advised fund (DAF) if a client isn’t 100% sure about which charities they want to support. These are similar to the private foundations established by the very wealthy, but they’re a more practical way to prepay gifts for people across the wealth spectrum. In a DAF, the client makes an irrevocable donation and receives an immediate tax deduction. Their gift then grows tax-free in the DAF. The client can then, at a later time, choose which charitable organizations to make grants to from the funds in the DAF.

2. Use IRA Rollovers and Other Retirement Plans
Retirement assets have both lifetime and at-death planning opportunities. Because of the estate and income taxes that occur when IRAs are passed on to beneficiaries, they’re an excellent – and tax-efficient – way to include charitable giving in your clients’ estate plans.

Instruct your client to designate a charity as a beneficiary on retirement plan assets (and leave life insurance or other property to family or non-charity beneficiaries). The charity will pay no income tax on the retirement plan or IRA proceeds, retaining the full value of the charitable gift. Let your clients know that donating their IRA value to a charity means bypassing loss of the IRA’s value through income tax as well, and they are likely to see the value in this resourceful strategy.

During life, there are planning opportunities too. Clients over 70 ½ can use the IRA to charity rollover to avoid the entire income tax deduction issue since funds directly given from an IRA to a charity are not added to taxable income. This way, the client gets an income tax benefit whether they itemize or not because the direct distribution to the charity effectively bypasses your client’s tax return.

3. Use Charitable Lead and Remainder Trusts
There are a variety of trusts that can provide significant benefit for your wealthy clients — especially if we work together proactively to plan the sale of an asset with significant gain. CLTs and CRTs are two notable examples.

Charitable Lead Trust (CLT): CLTs are a type of irrevocable trust that can help your clients achieve their charitable giving goals by providing money to a charity over a set period of time without their assets being eaten away by taxation. Once the stated period of time has elapsed, the remaining sum can be passed onto their chosen loved ones or other beneficiaries. In a CLT, the charity receives money now and for a specified period of time and then the remainder is left for your non-charitable beneficiaries.
Charitable Remainder Trust (CRT): CRTs are also a type of charitable trust. CRTs provide a stream of income to your client for a period of years or a lifetime, with the remainder going to the charity of their choice. Because of the tax benefits these trusts receive, they can be an excellent vehicle to convert highly appreciated assets into lifelong or retirement income for the right client while also achieving a clients’ charitable goals.

For your clients who are interested in starting or continuing their charitable giving efforts, the Tax Act has likely caused a fair bit of confusion and concern about a loss of tax benefits. By using these strategies, we can collectively help realign your clients giving plans with the new legislative realities caused by the Tax Act. We are here to help and collaborate as key players on your clients’ planning team.
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