$75,000 Tax Savings: Strategic Charitable Giving Plan

$75,000 Tax Savings: Strategic Charitable Giving Plan

Executive Summary

A high-net-worth client with significant philanthropic goals sought to optimize their charitable giving for maximum tax benefits. Golden Door Asset developed and implemented a strategic charitable giving plan leveraging appreciated securities and a donor-advised fund (DAF). This approach allowed the client to significantly increase their charitable contributions while realizing $75,000 in tax savings.

The Challenge

Our client, a successful entrepreneur in their late 50s, had a strong desire to support several charitable organizations focused on environmental conservation and educational opportunities for underprivileged youth. While they were already making regular donations, they felt they could do more, but were concerned about the impact on their overall tax burden and long-term financial security.

Specifically, the client was donating approximately $25,000 annually in cash to various charities. They had substantial holdings in publicly traded stock, much of which had been acquired several years prior and had appreciated significantly. Selling these assets to generate cash for donations would trigger substantial capital gains taxes. Further compounding the challenge, the client’s income often fluctuated, making it difficult to plan consistent giving strategies. They wanted a solution that would allow them to:

• Increase their charitable giving by at least 20% annually.
• Minimize the impact of capital gains taxes on appreciated assets.
• Maintain a degree of control and flexibility over the distribution of their charitable funds.
• Ensure compliance with all relevant IRS regulations and guidelines.
• Potentially front-load charitable deductions to benefit from higher income years.
• They were already exceeding the standard deduction threshold, making itemizing worthwhile, but concerned about the limits on cash donations as a percentage of Adjusted Gross Income (AGI).

The client also expressed a desire to explore more sophisticated giving strategies, such as the use of a donor-advised fund, but lacked the time and expertise to navigate the complexities of these options. They needed a trusted partner to guide them through the process and ensure that their charitable giving aligned with their financial goals.

The Approach

Golden Door Asset began by conducting a thorough analysis of the client’s financial situation, including their income, assets, liabilities, and tax returns. This analysis revealed the significant potential for tax savings through strategic charitable giving. We then developed a customized charitable giving plan that addressed the client’s specific needs and objectives.

Our approach centered on two key strategies:

1. Donation of Appreciated Securities: Instead of selling appreciated stock and donating the cash, we advised the client to donate the stock directly to a qualified charity or a donor-advised fund. By donating appreciated securities held for more than one year, the client could deduct the fair market value of the assets as a charitable contribution, up to a certain percentage of their adjusted gross income (AGI), and avoid paying capital gains taxes on the appreciation.

   • Asset Selection: We meticulously reviewed the client's investment portfolio to identify assets with the highest appreciation and longest holding periods, ensuring they met the criteria for tax-deductible donations.
   • Coordination with Custodian: We facilitated the transfer of the securities from the client's brokerage account to the designated charitable recipient.

2. Establishment of a Donor-Advised Fund (DAF): We recommended the client establish a donor-advised fund at a reputable financial institution. A DAF is a charitable giving vehicle that allows donors to make irrevocable contributions of cash, stock, or other assets and receive an immediate tax deduction. The funds in the DAF can then be invested and grow tax-free. The donor retains advisory privileges and can recommend grants to qualified charities over time.

   • Strategic Front-Loading: We advised the client to "front-load" their charitable giving by contributing a significant amount to the DAF in a single year, maximizing their tax deduction in a high-income year and creating a pool of funds to support their philanthropic goals over several years.
   • Grant Distribution Strategy: We worked with the client to develop a grant distribution strategy that aligned with their charitable objectives and ensured that the funds were used effectively by the recipient organizations.
   • Tax Optimization: By front-loading contributions, the client was able to strategically itemize deductions in a high-income year, potentially exceeding the standard deduction in subsequent years when they might take the standard deduction instead.

We also coordinated closely with the client’s CPA to ensure that the charitable giving plan was fully integrated with their overall tax planning strategy and that all contributions were properly documented and reported.

Technical Implementation

The technical implementation involved several key steps:

1. Portfolio Analysis: Using Golden Door Asset's proprietary AI-powered portfolio analysis tools, we identified approximately $150,000 worth of publicly traded stock with significant unrealized gains. These securities had an average cost basis of $30,000, resulting in a total appreciation of $120,000. Without the charitable giving strategy, selling these assets would have resulted in a capital gains tax liability of approximately $18,000 (assuming a 15% long-term capital gains tax rate).

2. DAF Selection and Establishment: We researched and recommended several reputable donor-advised fund sponsors, considering factors such as fees, investment options, and grantmaking policies. The client ultimately chose Fidelity Charitable. We assisted with the application process and ensured that all required documentation was completed accurately and efficiently.

3. Securities Transfer: We coordinated with the client's brokerage firm to transfer the selected $150,000 worth of stock to the DAF. This involved completing the necessary transfer forms and providing the DAF sponsor with the required information about the securities.

4. Tax Deduction Calculation: We calculated the client's potential tax deduction based on the fair market value of the donated securities and the applicable AGI limitations. Since the securities were held for more than one year, the client was able to deduct the full fair market value of the assets, up to 50% of their AGI. Cash donations are usually capped at 60% of AGI, making appreciated securities a more powerful planning tool.

5. Grant Recommendation and Distribution: We assisted the client in developing a grant recommendation strategy for the DAF. We helped them identify qualified charities that aligned with their philanthropic goals and facilitated the distribution of grants to these organizations.

6. Coordination with CPA: We worked closely with the client's CPA to ensure that the charitable contributions were properly reported on their tax return and that all required documentation was maintained. We provided the CPA with detailed information about the donated securities, the DAF, and the grant distributions.

Results & ROI

The strategic charitable giving plan implemented by Golden Door Asset delivered significant financial benefits for the client:

• Tax Savings: The client realized $75,000 in tax savings as a result of donating appreciated securities to the DAF. This savings was primarily due to the avoidance of capital gains taxes on the appreciated stock and the charitable tax deduction. The savings was derived from:

  • $18,000 avoided in capital gains taxes (15% of $120,000 appreciation).
  • $57,000 in income tax reduction (assuming a 37% marginal tax bracket on the $150,000 donation).

• Increased Charitable Giving: The tax savings allowed the client to increase their annual charitable contributions by 20%, from $25,000 to $30,000, without significantly impacting their cash flow.

• Enhanced Control and Flexibility: The DAF provided the client with greater control and flexibility over their charitable giving. They could recommend grants to qualified charities at any time, and the funds in the DAF continued to grow tax-free, allowing them to support their philanthropic goals over the long term.

• Simplified Tax Reporting: The DAF simplified the client's tax reporting process by providing a single, consolidated statement of all contributions and grant distributions.

• Long-Term Philanthropic Impact: By establishing a DAF and developing a strategic grant distribution plan, the client was able to create a lasting philanthropic legacy that would benefit their chosen charities for years to come.

• Overall ROI: For every dollar invested in the implementation of the strategic charitable giving plan (including consulting fees), the client realized a return of approximately $15 in tax savings.

Key Takeaways

Here are some actionable insights for RIAs and wealth managers considering implementing similar strategies for their clients:

1. Proactive Engagement: Initiate conversations about charitable giving with clients, especially those with significant appreciated assets and a history of philanthropy. Many clients are unaware of the potential tax benefits of strategic giving.
2. Holistic Planning: Integrate charitable giving into the client's overall financial plan, considering their income, assets, liabilities, and tax situation.
3. Strategic Use of Appreciated Assets: Prioritize the donation of appreciated securities over cash donations whenever possible to maximize tax benefits and minimize capital gains taxes.
4. Donor-Advised Funds as a Versatile Tool: Consider donor-advised funds as a valuable tool for clients who want greater control and flexibility over their charitable giving.
5. Collaboration is Key: Collaborate closely with the client's CPA and other advisors to ensure that the charitable giving plan is fully integrated with their overall financial strategy and that all required documentation is properly maintained.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors identify opportunities to enhance client outcomes and optimize their practice. Visit our tools to see how we can help your practice.