Charitable giving for high-net-worth clients comes with new tax perks thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act.
“I think wealthy donors plan to maintain or even increase the amount to charity this year,” said Lisa Colletti, J.D./CFP and managing director and partner at Aspiriant in New York. “While portfolio values are down, the wealthy are keenly aware the need for support is way up.”
“The most common inquiry we’ve fielded is around charitable planning,” said Steve Wittenberg, director of legacy planning at SEI Private Wealth Management in Oaks, Pa. “For those who itemize, elimination of the 60% AGI limit on cash contributions to charitable entities sparks opportunities for wealthy clients. They can choose to give up to 100% of AGI in cash to charity.”
Perks can last into the future, too. “Any amount contributed in excess of the AGI can be carried forward and deducted over the next five years,” added Bruce Primeau, a CPA at Summit Wealth Advocates in Prior Lake, Minn.
CARES provides a $300 above-the-line deduction “but only for individuals who use the standard deduction,” added Gerry Joyce, national head of trusts and estates at Fiduciary Trust International in New York. There are two other conditions. “This is only valid in 2020, and it’s allowed only for gifts of cash to a public charity, which would not include a donor-advised fund [DAF] or a non-operating private foundation,” Joyce said.
“Contributions to DAFs and non-operating private foundations don’t qualify for this additional tax break,” added Kathy Buchs, CPA and a director at MAI Capital Management in Cleveland. “For a charitably inclined taxpayer, it may be a good time to consider a Roth conversion while values are low and potential charitable contribution deductions are high.”
For such clients, “the ability to deduct 100% of AGI means that the individual can convert the IRA and make a charitable gift equal to the amount of the taxable conversion, which will effectively eliminate income tax on the conversion,” Joyce said, adding that this is available only to those who can afford to make the charitable gift needed to equalize for the amount of the Roth conversion.
Donors who have planned gifts in their estate plan should examine lifetime charitable gifts, which offer the benefit of “meeting the immediate needs of charities and taking a current income tax deduction rather than a deferred estate tax deduction,” said Suzanne Shier, Chicago-based wealth-planning practice executive and chief tax strategist for Northern Trust Wealth Management.
Gifts of long-term appreciated marketable securities might work especially well. “Donors who have losses may consider harvesting them, which may offset gains to reduce gains taxes, and then contribute the cash proceeds to charity and claim a deduction,” she said.
An occasionally down market and historically low-interest rate environment also make this a good time to consider a charitable lead annuity trust (CLAT). “A donor contributes assets to the trust, which in turn makes payments to charity for the term of the trust,” Colletti said. “Assets remaining in the trust pass back to the donor or another beneficiary when the trust term expires. Depressed markets support a greater wealth transfer opportunity should trust appreciation exceed the interest rate.”
CLATs are typically structured to attract no estate tax while at the same time passing any total return in excess of the IRS “discount rate” (aka a “hurdle rate”), now at a low 0.8%, Joyce said. “If the asset or portfolio inside the CLAT produces greater than an average of 0.8% per year, then such return above the hurdle rate will pass tax-free to a trust for future generations,” he added.
Separate from tax planning are the opportunities to cut estate taxes. “The hit to the economy is reducing the valuation of not just equities but privately held businesses,” Wittenberg said. “Wealthy individuals can use their lifetime exemption and get more bang for their buck, gifting potentially temporarily low valuations of their business ownership to the next generation or in trust.”
