TRUST & ESTATE PLANNING

Answers to Your Year-End Charitable Giving Questions

11.17.2020 - Bryan Kirk

Theresa McGinley, Director of Trust Administration and Trust Counsel, and Bryan Kirk, Director of Estate and Financial Planning and Trust Counsel, answer your questions about the potential tax benefits of year-end charitable planning in the unique circumstances of 2020.

1. What makes 2020 a unique year for charitable giving?

THERESA: First, we need to acknowledge the need in our communities.  According to an October report from the non-profit Feeding America, food-insecurity is projected to increase over 50% in 2020 for certain states in comparison to 2018.[1]  We’ve seen the lines at foodbanks.  We know many businesses are struggling.  We also know charities have taken a hit.  Many of our cultural institutions are not receiving revenues from ticket sales and events they normally rely on.  And smaller organizations without reserves are challenged to cover their overhead and keep staff employed, as charitable dollars are spread thin. 

BRYAN: 2020 is also unique in terms of the tax rules.  The CARES Act passed in March had two key incentives to motivate charitable giving.  First it allowed anyone to deduct $300 of charitable gifts even if they don’t itemize deductions.  Then it increased the limit on charitable deductions.  Generally, if you give cash to a public charity, you may claim up to 60% of your adjusted gross income or AGI as a charitable donation.  For example, if your AGI is $100,000 you can donate $60,000 in cash to a public charity and claim the entire $60,000 as a deduction.  Now, for 2020 only, the CARES Act raised that limit to 100% of your AGI.  In other words, if your AGI is $100,000 and you donate $100,000 in cash to a public charity, you can offset the entire $100,000 of income for 2020. 

2. Are there certain situations where the 100% AGI deduction may be especially impactful?

BRYAN:  The increased AGI deduction for 2020 may be particularly impactful for individuals with outstanding charitable pledges.  If you’re looking to get the maximum tax benefit from your pledge, giving in 2020 will enable you to take advantage of the larger tax deduction.  The ability to deduct 100% of your AGI may also be impactful for individuals with large income tax events in 2020.  For example, if you converted a traditional IRA to a ROTH IRA, you could combine that with a large charitable gift to offset the income from the conversion.  Also, we have had clients selling homes or businesses with plans to make large contributions to charity, which they could accelerate to match the capital gains in the current year.

3. Can you review the requirements on the 100% AGI deduction and the rules that apply if you don’t meet those requirements?

THERESA:  First, the rule only applies to 2020.  Second, the donation must be in cash.  Third, the donation must be to a public charity (other than a donor-advised fund) or a private operating foundation.  The Act excluded gifts to donor-advised funds and private non-operating foundations, because the goal was to push people to get money out into the community as directly and immediately as possible.

With cash donations to a donor-advised funds, the normal 60% AGI limit applies.  In addition, the normal rules still apply with donations of appreciated property.  If you are donating appreciated property to any public charity, the deduction limit is lower, at 30% of your AGI.  And, if you donate to a private foundation instead of a public charity, deductions are capped at 30% of your AGI for cash donations and 20% when donating appreciated property.

4. Should I still be donating securities instead of cash in 2020?

BRYAN: Despite the special rules under the CARES Act and the lower deduction limitations for appreciated property—30% of your AGI for public charities and 20% for foundations—donating appreciated stock still generally should be option #1 for charitable gifting in 2020.  With certain stocks outperforming for 2020, you can accomplish multiple goals by donating those appreciated securities.  First, you can receive a charitable deduction for the fair market value of the stock.  Second, you avoid the capital gain on the sale of the stock, since the charity receives the stock in-kind and can sell it without incurring tax.  And third, it can help rebalance your portfolio when it has become concentrated around certain holdings.  In discussing what to give to charity, I always start with the outperformers in your portfolio.   

5. Are there other reasons to think about increasing your gifting in 2020?

THERESA: If you are not certain if you will itemize deductions for 2020, you may want to increase your charitable contributions in 2020, or perhaps wait to group them in 2021. Ideally, you can deduct all your charitable contributions.  But you can only deduct your contributions if your total itemized deductions, including charitable contributions, exceed the standard deduction of $12,400 for single filers in 2020 ($24,800 for married taxpayers filing jointly).  In 2021, the numbers go up to $12,550 and $25,100.  If you aren’t above those thresholds independent of your gifts to charities, it generally makes sense to combine your gifts for multiple years into one year to receive the maximum tax benefit.  If you don’t want to give money to charities all at once, you can use a donor-advised fund to bundle your gifts in a single year and provide the money to the charities over a longer timeline. 

6. Have the elections influenced how you think about charitable giving for 2020 and going forward?

BRYAN: President-elect Biden’s campaign proposals included increases in both ordinary income tax rates for individuals with income over $400,000 a year and capital gains tax rates for individuals with income over $1,000,000 a year.  This has led some people to consider deferring charitable deductions until 2021 when there’s a possibility of higher tax rates, but we’d encourage you to run the numbers before making that decision.  If you’re able to use the contribution to offset income in 2020, the bird in hand may be better than the chance at an extra one possibly in the bush. 

THERESA: The election results may be more relevant to planning for charitable trusts.  If capital gains tax rates increase, it could make charitable remainder trusts or CRTs more popular.  CRTs are typically used to avoid income taxes on the sale of an asset, while also providing you an immediate income tax deduction and a stream of payments for the term of the trust.  If you have an asset you’re considering selling, and total federal and state capital gains taxes might be close to or more than half of your gain, a CRT may be a desirable strategy to address the gain. CRT are a long-term strategy, so we regularly work to ensure proper governance and investment strategies are in place to have the future impact you intend.

BRYAN: Charitable trusts also may become more widely used in estate tax planning, if estate tax rules return to impacting a greater number of people.  A charitable lead trust is the opposite of a CRT, and its purpose is generally to avoid estate taxes.  You make a gift to the trust.  The charity receives an income stream for the term of the trust.  Then, the remaining assets in the trust pass to your beneficiaries at the end of the term.  For estate tax purposes, the trust can be designed so the appreciation of the assets you contribute to the trust can go to your beneficiaries tax-free.  This strategy is particularly impactful in a low interest rate environment like we currently have.  

[1] https://www.feedingamerica.org/sites/default/files/2020-10/Brief_Local%20Impact_10.2020_0.pdf


This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

TRUST & ESTATE PLANNING

SLAT: A Key Strategy for Married Couples Making Large Gifts

11.20.2020 Bryan Kirk

NEXT POST

TRUST & ESTATE PLANNING

A Framework for Estate Planning: Start by Focusing on Yourself

11.16.2020 Leslie Gillin Bohner

PREVIOUS POST