Charitable Giving in Financial Planning

by Scott Escujuri

“..for persons wanting to give to charity but at the same time be able to maintain some level of control, a financial planner can help you create a Donor Advised Fund (DAF). You can then make a charitable gift to your DAF, claiming the entire deduction in the year of the gift, but then still exercise some control over when and how the money in the DAF is used for various charities.”

I read a statistic the other day that Americans gave nearly half a trillion dollars to charities in 2021. That money, in large part, went to churches, schools and universities, human services, grantmaking foundations, and for general societal benefit.

Huge corporations and ultra-wealthy individuals sometimes give very large sums to charities. But you don’t have to be rich to give. It seems to be human nature to want to help others. My guess is that most of you reading this article have, at one time or another, made a donation.

What many don’t realize, however, is that certain charitable donations can actually play a very meaningful part of a well-designed financial plan, even if you don’t consider yourself “rich.”

For very wealthy individuals, charitable giving can help reduce the size of their estate and reduce or avoid estate taxes after their death. The IRS recently announced that the 2023 Estate Tax Exemption will be $12.92 million for an individual or $25.84 million for a couple. In other words, if an individual dies with $14 million dollars, the first $12.92 million would be exempt from the estate tax, with the additional million dollars or so being heavily taxed by the government. However, if that same individual utilized charitable giving, the size of his/her estate could be reduced below the exemption amount, allowing the balance to transfer to heirs tax free.

But what if you don’t have more than $12.92 million dollars? Charitable donations can still be valuable to you as the giver, especially if you’re working with a financial planner who understands the rules. For those of you old enough, you’re familiar with the term RMD (required minimum distribution) -- the amount you’re required to withdraw from your IRA/401k once you turn 72 (increasing to 73 next year).

The only problem is that the tax you’ve been deferring all these years is finally due, and you must pay tax on the amount you pull out for your RMD unless you utilize a few narrow exceptions. If you’re a churchgoer paying tithing, for example, the IRS allows you to make what’s called a Qualified Charitable Distribution (QCD). In that case, your RMD would be sent directly from your IRA to your church. This is money you would have paid anyway. But, because you make the payment as a QCD, you do not have to pay the tax on the RMD which would normally be required. In this example, a person with a $10,000 RMD could pay $10,000 of tithing to his/her church by way of a QCD and save roughly $3,000 in taxes they would have otherwise owed. This works for anyone, regardless of your level of wealth.

Additionally, for persons wanting to give to charity but at the same time be able to maintain some level of control, a financial planner can help you create a Donor Advised Fund (DAF). You can then make a charitable gift to your DAF, claiming the entire deduction in the year of the gift, but then still exercise some control over when and how the money in the DAF is used for various charities. In other words, rather than giving it all to your alma mater, for example, in the current year, you could parse it out over the next several years, and even change charities part way through.

These are just a few of the many examples of how charitable giving can be part of your financial plan. Be aware that the rules around these and other strategies can be complicated and confusing. Working with the right professionals is key to understanding not just your options but how best to implement them into your overall financial strategy. If you’re interested in learning more about these options, please let us know, and we will be happy to schedule a meeting.