2020 is a “perfect storm” for estate planning and charitable giving.  Several factors (low interest rates, depressed asset valuations, and a high federal gifting exemption) have created this generation’s best opportunity for saving on taxes.  

Not only is 2020 an ideal year for estate planning, but it is also ideal for charitable giving. Here are a few ideas to consider, many of which take care of you and your family while also providing a substantial gift to charity.  

Cash Gifts

The CARES Act, the stimulus bill passed this year, allows taxpayers to deduct up to 100% of adjusted gross income (AGI) with charitable gifts.  Previously, you could only deduct cash gifts up to 60% of AGI.  Note that these gifts must be in cash and given directly to a charitable organization.  Also, this special bonus deduction only applies to gifts made in 2020 [1].

Charitable Lead Trusts (CLTs)

CLTs provide income to charity with the remainder left to family or loved ones.  This allows you to provide a future gift for your heirs at a discount while also giving generously to charity.

Charitable Remainder Trusts (CRTs)

The SECURE Act, passed late last year, significantly changed inherited IRAs.  While previously all beneficiaries could stretch withdrawals over their lifetimes, now most beneficiaries must withdraw everything – and pay income taxes – within 10 years [2].  This is a significant blow for many who had planned to leave qualified retirement accounts to children, grandchildren, or other loved ones.  One possible workaround involves a CRT.  CRTs provide income to beneficiaries for a certain period or over their lifetimes, with the remaining balance donated to charity.  By leaving your IRA to a CRT, your beneficiary can receive income for longer than 10 years, with the rest benefiting charity.

Roth IRA Conversion

Combine charitable giving and a Roth conversion to create tax-free income in retirement.  For this strategy, you will donate in the same year you convert a Traditional IRA or 401(k).  The charitable gift will offset the additional taxes owed on the Roth conversion.  The funds you transferred to a Roth will also continue growing tax-free with no required minimum distributions (RMDs).  With lower asset valuations and RMDs waived in the CARES Act, this could be a great strategy for 2020.

Compound Gift

You can also consider a compound gift. Donate the tax savings from your charitable gift, in addition to the gift itself.  You can make the extra gift in the same year or following years from your original gift.  This is a way to “boost” your charitable giving without more out-of-pocket cost.

Qualified Charitable Distributions (QCDs)

For those over age 70 ½ with RMDs, you can give up to $100,000 of your RMD every year to charity [1].  For those who don’t need the RMD for living expenses, this allows the funds to escape taxation and reduces your tax bill.

Life insurance

Use life insurance to leave more to charity.  You can purchase a new policy or reuse an existing policy you no longer need.  By making a charity the beneficiary on your policy, the funds pass directly to charity tax-free.  You can also leave taxable assets, such as IRAs and 401(k)s, to charity and use life insurance to replace the donation with a tax-free gift to family.

Take Action

Whatever your goals are around leaving a legacy, it is never too early to begin planning.  This allows you to stay in control and provide for your family, loved ones, and desired charities in the best way possible.  Please contact us with any questions regarding your giving plan or for a comprehensive review.

[1] https://www.fidelitycharitable.org/articles/what-the-cares-act-means-for-charitable-giving.html

[2] https://money.usnews.com/money/retirement/iras/articles/what-is-the-secure-act