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Strategic Guidance For Life’s Next Move

Giving Back the Right Way

 Charitable Giving is something that many of us do, at least in moderation, to support the things we care about. While some of the benefits of donating are obvious, such as supporting the non-profits or charities that you care about, others are more difficult to discover. Additionally, HOW you donate plays a huge role in the way your donation is treated. In this article, we will be giving a brief overview of some of the most common ways to donate as well as the benefits of each. The information contained is for general informational purposes only. You should consult with an attorney or tax professional in making decisions regarding financial matters as these rules change frequently.

Gifting Rules

 Before we delve into the realm of Charitable Giving, I think it will be helpful to briefly review the IRS’ regulations about gifting generally. This area of law is seldom understood and, in my presentation, “When Good Gifts Go Bad,” we review some of the common pitfalls people fall into.

Annual Gifts. Every person has the ability to gift a certain amount of money to any other person, charity, or entity of their choosing without tax consequences. This limit is adjusted for inflation periodically and was increased to $16,000.00 in 2022. Note that as a married couple, you can double that figure as you each have that amount to gift. If you go over the annual limit you are required to complete a 709 Gift Tax Return with the IRS. Failure to do so can mean the IRS comes back and seeks taxes and penalties based on the size of the gift.

Lifetime Gifting Amounts. In addition to the annual limits, every person has a lifetime amount of assets they can pass to others without being subject to gift or inheritance taxes. As that suggests, the lifetime gift amount can be used either during your lifetime, or after you pass away. This figure has fluctuated wildly throughout the years but is currently very high. In 2022, the lifetime gift/inheritance limit is 12,060,000.00 (Twelve million and sixty thousand). The base number for 2021 is $4,625,800 per person adjusted for inflation. However, as part of the 2017 Tax Cuts and Jobs Act, the lifetime limits were doubled. This doubling is set to expire as of January 1, 2026; however, Congress may change the rules before we get there.

Opportunity for Tax Free Gifts. This temporary doubling of the lifetime limits has given people a unique opportunity to pass on more of their wealth to family members and charitable organizations before federal inheritance or gift taxes become payable. When the IRS released its final regulations back in 2019, it made it clear that there would be no “clawback” for gifts made in excess of the lifetime limits. That means that if you transfer an amount over the lifetime limits now and the lifetime limits come down in the future, the IRS will not go back and try to collect taxes on gifts made while the lifetime amounts were higher. Since we are not yet in 2026, this has not yet been seen in action, but any material changes to this regulation would likely not be retroactive as there would be issues in passing an “ex post facto” (after-the-fact) law. That means the best time to donate may be right now.

Straight donation

 An outright donation to a charity is probably the most common way in which people give to organizations they care about. While any donations to qualified organizations can be used to reduce your taxable income, other means to donate will allow you to maximize tax benefits while providing flexibility in the long term.

Generally speaking, each individual can subtract charitable donations up to 60 percent of their adjusted gross income when itemizing their income tax deductions. This benefit is a good start, but many families will not donate a large enough amount in order to make itemized deductions worth it when compared to your standard deductions. This option also may leave money on the table and you likely have better options.

Charitable remainder trust.

 A Charitable Remainder Trust (“CRT”) is one of the more common ways to support a qualified organization that you care about. As you will see, the numerous benefits of a Charitable Remainder Trust make it clear why.

What is a Charitable Remainder Trust? A Charitable Remainder Trust (“CRT”) can be set up either as a stand-alone Trust, or a sub-trust within a family Trust. It is an irrevocable trust designed to receive funds or assets that will benefit both chosen beneficiaries (such as children) and qualified organizations. A CRT holds those assets and the Trustee manages them. The CRT pays an income to the beneficiaries you choose for up to 20 years. When the time frame for payments has run, any assets left in the CRT are paid to the qualified non-profit or charity of your choosing.

Now for the good part. CRTs are tax-free. What does that mean? In short, CRTs do not pay capital gains or income tax. A common strategy used is to transfer highly appreciated assets into a CRT before they are sold. Where an individual would have to pay tax based on the appreciated value of an asset, a CRT does not. If the assets in the CRT earn an income, again, there is no tax. This has the added benefit of removing assets from your taxable estate at a lesser value.

Keep in mind, however, that when the beneficiary named gets the periodic income payment, that income is taxable and is added to his or her annual income tax return. Even still, this can be a powerful tool in reducing capital gains tax.

In addition to the above, you, as the donor get to claim a charitable deduction, as with a straight donation, in the year in which you create and fund the CRT. (subject to the same limitations above).

Once the payment to the CRT is made it is out of your taxable estate. If the funds grow or appreciate, you would not be taxed on the increased value if your estate would otherwise be subject to gift or inheritance taxes.

Asset Protection. Another benefit of a CRT is that it is beyond the reach of litigants, creditors, or others. (In most cases). That means you can gift an amount to a CRT, receive an income back from the Trust for 20 years and the principal amount cannot be touched by anyone else.

IRA/401K and the SECURE Act.

 Additionally, a relatively new benefit of CRTs has come about due to the SECURE ACT. The SECURE ACT went into effect in the year 2020. While this law changed many things, we will be focusing on changes related to IRAs and 401ks. Some changes, like not being required to take required minimum distributions (RMDs) until you are 72 are relatively innocuous, the changes to inherited IRA’s were quite significant.

Elimination of the Stretch IRA

 The stretch IRA is a term used to describe payments out of an IRA when it is inherited by a named beneficiary. It works like this, if a beneficiary inherits an IRA from another person, that beneficiary needs to start taking out RMDs regardless of his or her age. The amount of the RMD is typically calculated by looking at the value of the account and the life expectancy of the beneficiary. That beneficiary then can stretch out payments from that IRA over, often times, several decades.

While the stretch is still available to a surviving spouse, or in other very limited circumstances, for most people it is gone. Under the SECURE Act, an inherited IRA now must all be taken out within 10 years, period. In short, that means that larger distributions are required which not only increases taxes on the distributions, but can increase the beneficiary’s tax bracket for income tax.

How does a CRT help? One of the few ways around the required 10 year payout is through a CRT. With a CRT you retain the ability to make payments to a chosen beneficiary for 20 years. This doubles the time for payments and can significantly reduce the tax burdens on the beneficiaries you choose. Additionally, it can serve to extend the protections of the assets in the IRA from any issues your beneficiaries may run into.

Charitable Lead Trust

 A Charitable Lead Trust (“CLT”) is similar to a CRT but operates in reverse, and loses some of the tax benefits of a CRT. Unlike a CRT, a CLT pays the income to the charity or qualified non-profit over a term of years. When the time frame for payments has lapsed, any amounts remaining in the trust are paid out to a beneficiary of your choosing (even yourself).

You, as the donor of the CLT, can often receive the same income tax deductions as with an outright donation, or through a CRT. A CLT is not tax-free like a CRT, however.  That means income tax and capital gains tax would still need to be paid out of the trust. Taxes on CLTs can be very complicated and a qualified tax professional should be consulted before taking action.

Distributions directly from your IRA/401K

 Another option that is often overlooked is the ability to roll over portions of your IRA/401k directly to the qualified non-profit or charity of your choosing. The IRS permits people who have reached the age for RMDs (seventy-two in 2022), to roll over up to $100,000 from his or her IRA to such an organization without that donation being counted as taxable income. Even better, that withdrawal, while not counted as taxable income, it DOES count towards your RMDs for the year. That means that if you have a year in which you would be in a higher tax bracket, you can use this technique to satisfy your RMD requirement with the tax consequences you normally see.

Preserving Flexibility in your Charitable Giving

 A common concern shared by those who do any type of long-term giving, or those that leave gifts in their Will or Trust, is “What happens if the non-profit or charity goes under?” In short, there are a couple of legal principles that come to the rescue.

The first is a term called cy pres. In non-lawyer speak, cy pres means “as close as possible,” and comes into play for almost any type of charitable gift. If the non-profit or charity you named dissolves the doctrine of cy pres allows the person making the gift to direct those funds to another organization that has a purpose as close to the original organization as possible. This is done to preserve the intent of the original gift giver.

Another option we see used is something called a Donor Advised Fund. A Donor Advised Fund (“DAF”) is a fund established as a public charity. (A section 501(c)(3) organization). A DAF allows you to make a charitable contribution to the Fund and receive that same immediate income tax deduction as we see above. However, the ultimate organization that the donation is given to is not set in stone. The donor retains advisory privileges regarding the distribution of funds. In short, that means you can change the organization that is donated to every year. Moreover, all the funds do not need to be distributed at once. As a charitable organization, if the assets in the Fund grow, they are not taxed. In recent years, Donor Advised Funds have been used as tax shelters by those seeking to avoid properly payable taxes. As such, the IRS is considering additional rules regarding these organizations. Overall, the flexibility and tax benefits should largely be preserved, but the nuances of the law may be subject to change in the future.


 In sum, charitable giving is a great way to give back and support the community in which we live. However, like many things in law and with taxes, doing it the right way can yield even greater benefits to you. Should we contribute to local non-profits or charities? Absolutely, just make sure you speak with a qualified professional to discuss what best serves you, your family, and even the organization you want to support.