Selecting the right assets to give to charity

Selecting the right assets to give to charity—during life or at death—can significantly boost the efficiency of your overall planning.

Lifetime giving—give long-term appreciated stock instead of cash

Subject to certain restrictions relating to private company stock, if you contribute stock that you’ve held for over a year to either a private foundation or a public charity (including a donor-advised fund), you are entitled to deduct the full fair-market value of the stock up to certain limits—30% of your adjusted gross income (AGI) for gifts to a public charity, and 20% of your AGI for gifts to a private foundation. You can carry forward any unused deduction for five years.

Making charitable gifts with long-term appreciated stock has another benefit—you completely avoid paying capital gains tax on the appreciation.

Lifetime giving—if you’re at least 70½, take advantage of your ability to contribute to charity directly from your IRA

If you are 70½ or older, you can make a direct transfer of up to $100,000 each year from an IRA to qualified charities (not including private foundations, donor-advised funds or supporting organizations) and count that donation toward your required minimum distribution for the year. These distributions are neither includible in your income nor deductible (since they aren’t included in your income). By making these direct distributions to charity, you do not have to recognize potentially unwanted income—which could also otherwise have the effect of increasing your tax bracket.

Giving at death—use retirement assets to make charitable gifts at death

If you want to make charitable gifts on your death—whether to your family’s private foundation, to a donor-advised fund, or to a public charity—retirement assets (e.g., 401(k) or traditional IRA) are the most efficient assets to use.

This is because not only are these assets subject to estate tax upon your death (despite passing directly to the beneficiaries you have named), but they are also subject to income tax when your beneficiaries take withdrawals. While the beneficiaries get a deduction to reduce this double tax, the combined income and estate tax rate on retirement assets can exceed 60%. Retirement assets that pass to charity, however, generally qualify for the income and estate tax charitable deductions. (All this assumes that your taxable estate exceeds the relevant federal and state exemptions and does not qualify for a marital deduction.)

By using retirement assets to satisfy charitable bequests, more of your taxable assets eventually pass to your individual heirs—and receive a step-up in basis, which means that your beneficiaries receive the value of the gift without any embedded income tax liability. Even if you don’t have an estate subject to estate tax, organizing your gifts like this this can give your heirs a significant benefit.

For example, if you leave an IRA of $100,000 to your children and your estate is subject to estate tax, the combined tax rate on these assets could cost your children over $60,000 (even though your beneficiaries can stretch their IRA distributions over their respective lifetimes). If instead you leave that same IRA to a family charity controlled by your children, they would end up with all $100,000 to use for charitable purposes. If it’s a choice between leaving a bequest in your Will vs. a gift of retirement assets, there can be a tremendous economic benefit to your family if you fund charitable bequests with your retirement assets.

If you decide to leave your retirement assets to charity, you will need to make sure that your beneficiary designations reflect your wishes, naming the appropriate charity(ies). You may also need your spouse’s signature to acknowledge that he or she consents to your giving retirement assets to charity rather than to him or her. Also, make sure that you update your Will or revocable trust to remove any existing charitable bequests that you intend to be covered by your retirement accounts; if you leave a bequest in your estate planning documents, charity will get both gifts—the gift as the beneficiary of your retirement account and the gift as the beneficiary of your Will or revocable trust.

Talk to your J.P. Morgan representative to set up time to review your options for making charitable gifts. Be sure to coordinate your beneficiary designations and your charitable planning with the rest of your estate planning.


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