Affluent individuals and families may choose to implement charitable giving strategies for the wealth of benefits these strategies provide.
These benefits allow a family to connect with a personal cause or preserve their legacy while contributing to an efficient wealth strategy.
Charitable giving strategies can help affluent families and individuals to realize financial benefits as well as reduce current and estate taxes. These charitable giving strategies can include:
- Charitable lead annuity trusts (CLATs)
- Grantor-charitable annuity trusts, and
- Qualified charitable distributions
Let’s discuss each of these strategies and their benefits in detail.
Make a Qualified Charitable Distribution (QCD)
According to Investopedia, a qualified charitable distribution “allows owners of a traditional IRA to exclude RMDs from their adjusted gross income (AGI) if they give the money to approved charities, also known as qualified charitable organizations.”
In simpler terms, the QCD guideline allows individuals to deduct the amount they donate from their IRA. The QCD counts as part of their annual RMD amount, and they must pay the distribution directly from their IRA to the qualified charity.
*Distributions must be made directly to an approved charity and are capped at $100,000 annually per person. Please enlist the assistance of a qualified financial or tax advisor to best navigate the process of making a qualified charitable distribution and earn the associated tax benefits.
Benefits of Making a Qualified Charitable Distribution
This charitable giving strategy can effectively reduce an affluent individual’s adjusted gross income while satisfying their required minimum distribution set by the IRS. Further, this strategy can help offset other taxes, such as social security.
Utilize Charitable Lead Annuity Trusts (CLATs)
A charitable lead annuity trust (CLAT) is a charitable trust in which a charity, donor-advised fund, or a foundation that the grantor selects, receives annual payments. These payments may be set for a term of years or the grantor’s lifetime.
At the end of this period, the remaining CLAT assets are distributed amongst the trust’s non-charitable beneficiaries. These beneficiaries are typically the grantor’s descendants or trusts for the descendants’ benefit.
Benefits of Charitable Lead Annuity Trusts (CLATs)
Charitable lead annuity trusts provide a gift tax efficient way for individuals to transfer wealth to heirs while benefiting charities.
However, CLATs are not exempt from income tax. If the grantor wants to claim the immediate income tax charitable deduction, the CLAT must be set up as a grantor trust, or G-CLAT.
Grantor Charitable Lead Annuity Trusts
In a grantor charitable lead annuity trust (G-CLAT), the trust corpus remaining at the end of the term is given back to the donor instead of the donor’s descendants.
G-CLATs provide a host of advantages, which will improve income tax planning, wealth transfer planning, and charitable planning. Let’s take a look at the benefits of this sophisticated charitable giving strategy.
Income Tax Planning
Individuals participating in the G-CLAT will experience the benefits of both immediate and long-term tax benefits once they’ve successfully implemented this charitable giving strategy.
This will result in an immediate income tax dedication for the individual, which is:
- Subject to 20 to 30% of adjusted gross income (AGI) limitation
- Able to be utilized over six tax years
- Ideally consumed at the highest marginal income tax rates
Wealth Transfer Planning
In addition to the immediate benefits of G-CLATs, these trusts also include wealth transfer tax savings. Through these savings, the taxpayer can experience the benefits of a G-CLAT for years.
While the taxpayer does not need to have donative intent, charitable planning benefits G-CLATs if the taxpayer decides to participate.
For instance, as a future benefit, G-CLATs provide satisfying charitable annuity payments with appreciated assets, avoiding recognition of gain on these distributions to 501(c)3s.
How to Get Started With These Charitable Giving Strategies
At Centura Wealth Advisory, we know how to optimize charitable giving strategies to best benefit your long-term financial goals. Our team has successfully implemented over 280 CLAT transactions alone.
Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.
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