Gift Planning as a retirement planning tool
There is no time like the present (while you are still working) to plan for fun-filled days of blissful retirement in a tax-wise manner. During our busy, sometimes frenetic, working years, it can be difficult to take time to consider retirement planning options that include a charitable gift component. But the effort may be well worth your time and sweat equity in terms of tax savings and your charitable impact over time.
Below are a few charitable retirement planning strategies to consider. You can learn more (than you likely want to know) about charitable deductions in I.R.S. Publication 526.
PRE-RETIREMENT CHARITABLE PLANNING
With the assumption that your income will be higher during your pre-retirement years, consider any or all of the following charitable giving strategies:
1. Using appreciated assets – e.g. stock, securities, or real estate – to fund larger charitable gifts. Appreciated assets may be used to make: outright gifts, or to fund life income gifts – such as a charitable remainder unitrust (CRUT) or charitable gift annuity (CGA). For a brief overview about these two types of life income gifts offered by Duke University, go to:
If you prefer to retain ownership of the specific appreciated stock/security you donate to charity, you can use the cash you would have otherwise given to charity to buy the same stock/security and lock in a higher cost basis, which reduces your taxable gain if you sell it in the future. There is no “wash sale” or similar rule that delays this purchase of the same or similar security.
2. If advantageous given your income level, resources, and tax deduction limits – consider pre-paying long term charitable commitments in one year (e.g. pre-pay a 5-year pledge to Duke) and “lump/bunch/stack” several years of charitable gift deductions into a single tax year. Again, use appreciated assets if possible. Then, take the standard deduction on your federal income tax return ($12,400 for single tax filers; $24,800 for a married couple in 2020) for one or more years thereafter, and repeat this strategy every few years.
3. Create a Donor Advised Fund (DAF) and build up the balance during your pre-retirement years. This can be used to make charitable gifts each year after you retire and are in a lower income tax bracket such that the charitable deduction benefit is less. You may want to fund (or add to) your DAF in a year in which you “lump/bunch/stack” deductions. A contribution to a public charity DAF will result in a higher current income tax deduction (for you as the donor) than contributions to more expensive options like a private (family) foundation.
4. Most types of retirement plans have contribution limitations – see http://www.pensionrights.org/publications/fact-sheet/retirement-plan-contribution-and-benefit-limits – but life income gifts – like charitable remainder unitrusts and charitable gift annuities – do not. Life income gifts produce an immediate income tax deduction for you (to save you taxes during your high income working years), can grow tax-free, and can be structured to reduce or defer income until after you retire.
5. If you are one of the fortunate folks who have a taxable estate (more than $11.58 million per individual; $23.16 million per couple in 2020), you may want to consider a charitable lead trust (CLT). A CLT can provide support for your favorite charities each year and reduce or eliminate estate tax on the assets you put in the CLT. These are especially attractive when interest rates are low, and at the time of this blog post, interest rates are at historic lows. For more information, see some of our other Blueprints articles on CLTs:
POST-RETIREMENT CHARITABLE PLANNING
With the assumption that your income will be lower during your post-retirement years, consider any or all of the following charitable giving strategies:
1. Once you reach 70 ½ years of age (whether pre- or post-retirement), consider using a charitable IRA rollover – also known as a qualified charitable distribution (QCD) from an IRA – to make charitable gifts of up to $100,000/year. Since a QCD does not result in higher adjusted gross income, it may reduce or eliminate the negative impact of higher income on a donor’s existing charitable (and other) deductions, higher Medicare premiums, self-employment and Social Security taxes, application of the Affordable Care Act’s 3.8% tax and other tax penalties.
A QCD also counts toward your required minimum distribution (RMD) from the IRA each year. The QCD must be an outright gift to the recipient charity under current law, but this may change. For an overview of the QCD rules and an example letter directing a gift to Duke University see:
State income tax treatment – Some states treat the charitable IRA rollover as income followed by a deduction. This varies state to state, so please check with your advisors.
For more information about the charitable IRA rollover, please visit our webpage
2. If you feel that you cannot afford to make an IRA rollover gift because you need the income, consider using your RMD (or appreciated assets) to fund a life income gift.
3. You may still make tax wise charitable gifts of appreciated assets through outright gifts or to fund a life income gift – such as a charitable remainder unitrust (CRUT) or a charitable gift annuity (CGA).
4. You may still want to lump/bunch/stack deductions in some post-retirement years and take the standard deduction on your federal income tax return ($12,400 for single tax filers; $24,800 for a married couple in 2020). You can also use, or add to, the DAF you funded pre-retirement to make charitable gifts you want to make each year.
5. Review any charitable gifts included in your estate plans every few years (or earlier if there are significant changes in the tax laws). Consider using IRAs or other tax deferred assets if your estate plans include any bequests to charity (like Duke). In short, a tax exempt charity can receive 100% of the IRA or other tax deferred assets, but your loved ones may receive much less after payment of (a) applicable income taxes (federal taxes as high as 37% in 2020, plus a 3.8% healthcare tax), and (b) any applicable state and federal estate taxes (40% federal; states vary widely).
Consider leaving appreciated assets that are NOT held in a tax deferred account to your loved ones, such as your house or other real estate, stock or securities. These assets receive a “stepped up cost basis” to their value at the owner’s death. In translation, this means your loved ones may pay little or no tax on the sale of these appreciated assets. The only tax would be on appreciation after the owner’s death.
For more information about charitable estate planning, please see these and other articles on our Blueprints blog: