Why Do People Give to Charities at End of Year?

Why Do People Give to Charities at End of Year?

The landscape for charitable giving has undergone a lot of change in recent years. More changes are likely around the corner. This year, a more intentional approach to year-end giving may be needed, according to the article “How to Make the most of Year-End Charitable Giving” from Wealth Management.

From the continuing pandemic to natural and humanitarian disasters, the need for relief is pressing on many sides. Donors with experience in philanthropy understand charitable giving as part of a tax strategy, part of providing the essential support needed by non-profits to keep operating and respond to emergencies and, at the same time, ensure their charitable dollars are aligned with their family values and missions.

For the tax perspective, changes resulting from the Tax Cuts and Jobs Act of 2017 left many nonprofits harshly impacted by the doubling of the standard deduction, which gave fewer people a financial incentive to donate. The question now is, could the latest round of proposed changes spur greater giving?

Amid all of these changes, sound and stable giving strategies remain the wisest option.

The CARES Act encouraged individual giving during times of hardship, and tax breaks were extended in 2021. However, certain incentives are now closing, such as the ability to deduct up to 100% of adjusted gross income for cash gifts made directly to public charities.

The Build Back Better Agenda proposes increasing the long-term capital gains tax rate for individuals with more than $400,000 of taxable income, and married couples filing jointly with more than $450,000 of taxable income, to 25%, plus a 3% surcharge to income of more than $5 million. This would make charitable giving more attractive from an income tax perspective. However, this bill has yet to be passed.

Consider the following strategies:

Qualified charitable distributions. RMDs must be taken in 2021. For donors taking a standard deduction, a qualified charitable distribution is a possible option. If you are 70½ and over, you can donate up to $100,000 from an IRA. This satisfies the RMD, as long as the gift goes directly to a charity, not to a Donor Advised Fund.

Contributions of appreciated stock. To make charitable gifts in the most tax-efficient way possible, a donation of appreciated stock is a smart move. Donors receive a charitable income tax deduction (subject to AGI limitations) and avoid capital gains tax.

Charitable bequests. The uncertainty around income tax reform includes estate taxes, and pro-active individuals are now reviewing their estate plans with their estate planning attorneys.

Funding a Donor Advised Fund (DAF). A DAF allows donors to contribute assets to a tax-free investment account, from which they can direct gifts to the charities of their choice. The contribution to the fund provides the donor with a charitable income tax deduction in the year it’s made.

Reference: Wealth Management (Oct. 11, 2021) “How to Make the most of Year-End Charitable Giving”

Read more about the article What are My Best Estate Planning Moves?

What are My Best Estate Planning Moves?

Tickertape’s recent article “5 Estate Planning Tips That Aren’t Just for the Wealthy” explains that a common misconception is that estate planning isn’t necessary if your estate assets amount to less than the 2021 federal estate tax exemption of $11.7 million per individual.

But most of us can benefit from estate planning. This can help protect your assets for your heirs. Estate planning includes creating a last will or revocable living trust, making certain that you have the right beneficiaries, and creating a health care directive. Creating a solid estate plan can decrease the odds that your family will have to deal with a problematic probate and reduce the amount of money because of unneeded taxes.

Create a Will. A last will is one way to let people know how you want your assets taken care of after you die. Plus, a last will should include information about who should act as guardians for minor children and care for any pets. Talk to an estate planning attorney about the specific laws for probate to make sure you do it correctly.

Name Your Beneficiaries. Review your beneficiary designations and make sure they’re up to date. When there’s a major life change, you should look at your beneficiary designations (e.g., life insurance and retirement funds), update your last will, and make sure everything matches. This includes charities as well as individuals. There are estate planning strategies designed to help you pass your assets on, but none of these will help if you don’t have your beneficiaries properly designated and assets aligned with your estate plan.

Ask Your Attorney About a Trust. A fully funded revocable living trust can be great tool to pass your assets on while potentially helping your heirs avoid probate. There are many different types of trusts that can be used to provide a variety of benefits. Much depends on your situation, so work with an experienced estate planning attorney.

Power of Attorney. Estate planning also includes documents in the event you become incapacitated. Signing a power of attorney allows an agent to make decisions on your behalf if you’re incapacitated. Find a person you trust to handle these decisions and have an estate planning attorney prepare the legal documents to ensure that everything is correct.

Think About Giving Now. You don’t need to wait until you’re gone to provide resources to your family. In 2021, you can give up to $15,000 to each recipient without paying the gift tax. If you’re married, each spouse can give $15,000. When you give to charity now, instead of waiting until you pass, you may claim a tax deduction, whether you donate directly, give stock, or set up a donor-advised fund. This allows you to benefit now—along with your beneficiaries.

Reference: Tickertape (June 25, 2021) “5 Estate Planning Tips That Aren’t Just for the Wealthy” 

How Do I Keep Money in the Family?

How Do I Keep Money in the Family?

That seems like an awfully large amount of money. You might think only the super wealthy need to worry about estate planning, but you’d be wrong to think planning is only necessary for the 1%.

US News and World Report’s recent article entitled “5 Estate Planning Tips to Keep Your Money in the Family” reminds us that estate taxes may be only part of it. In many cases, there are income tax ramifications.

Your heirs may have to pay federal income taxes on retirement accounts. Some states also have their own estate taxes. You also want to make certain that your assets are transferred to the right people. Speaking with an experienced estate planning attorney is the best way to sort through complex issues surrounding estate planning. Here are some things you should cover:

Create a Will. This is a basic first step. However, 68% of Americans don’t take it. Many of those who don’t have a will (about a third) say it’s because they don’t have enough assets to make it worthwhile. This is not true. Without a will, your estate is governed by state law and will be divided in probate court. Ask an experienced estate planning attorney to help you draft a will.  You should also review it on a regular basis because laws and family situations can change.

Review Your Beneficiaries. There are specific types of accounts, like retirement funds and life insurance in which the owners designate the beneficiaries, rather than this asset passing via the will. The named beneficiaries will also supersede any directions for the accounts in your will. Like your will, review your account beneficiaries after any major life change.

Consider a Trust. Ask an experienced estate planning attorney about a trust for possible tax benefits and the ability to control when a beneficiary gets their money (after they graduate college or only for a first home, for example). If money is put in an irrevocable trust, the assets no longer belong to you. Instead, they belong to the trust. That money can’t be subject to estate taxes. In addition, a trust isn’t subject to probate, which keeps it private.

Convert to Roth’s. If you have a traditional 401(k) or IRA account, it might unintentionally create a hefty tax bill for your heirs. When your children inherit an IRA, they inherit the income tax liability that goes with it. Regular income tax must be paid on distributions from all traditional retirement accounts. In the past, non-spousal heirs, such as children could “stretch” those distributions over their lifetime to reduce the total amount of taxes due. However, now the account must be completely liquidated within 10 years after the death of the owner. If the account balance is substantial, it could necessitate major distributions that may be taxed at a higher rate. To avoid leaving beneficiaries with a large tax bill, you can gradually convert traditional accounts to Roth accounts that have tax-free distributions. The amount converted will be taxable on your income taxes, so the objective is to limit each year’s conversion, so it doesn’t move you into a higher tax bracket.

Make Gifts While You’re Alive. A great way to make certain that your money stays in the family, is to just give it to your heirs while you’re alive. The IRS allows individuals to give up to $15,000 per person per year in gifts. If you’re concerned about your estate being taxable, these gifts can decrease its value, and the money is tax-free for recipients.

Charitable Donations. You can also reduce your estate value, by making charitable donations. Ask an experienced estate planning attorney about setting up a donor-advised fund, instead of making a one-time gift. This would give you an immediate tax deduction for money deposited in the fund and then let you make charitable grants over time. You could designate a child or grandchild as a successor in managing the fund.

Complicated strategies and a constantly changing tax code can make estate planning feel intimidating. However, ignoring it can be a costly mistake for your heirs. Talk to an estate planning attorney.

Reference:  US News and World Report (Sep. 30, 2020) “5 Estate Planning Tips to Keep Your Money in the Family”