What Is Planned Giving? The Options Tax Professionals Need to Know About

View all blog posts under Articles | View all blog posts under Taxation

A tax lawyer meets with clients.

Seventy-three percent of Americans gave to charitable causes according to a 2019 Gallup poll—and the reasons and ways they give are wide and varied.

The approach known as planned giving can maximize the value of charitable donations for donors from a tax planning perspective while also helping the charitable causes donors seek to support.

Tax professionals with knowledge of estate planning can help donors understand what planned giving is and explain its advantages. An advanced degree, such as a Master of Laws in Taxation or a Master of Taxation, can prepare graduates to help clients benefit from planned giving strategies.

How Planned Giving Is Affected by Tax Law

The Tax Cuts and Jobs Act of 2017 (TCJA) more than doubled the basic exclusion amount of federal gift, estate and generation-skipping exemptions—from $5.49 million in 2017 to $11.18 million (adjusted annually for inflation) from 2018 to 2025. For many potential donors, the higher basic exclusion amount reduces the incentive for them to give from their estates. This is because the higher basic exclusion amount means that fewer people face the prospect of paying federal estate taxes.

The TCJA also increases standard deductions, meaning the total amount of itemized deductions, including charitable deductions, must exceed the standardized tax deduction for a donor to see a tax benefit.

What does this mean for planned giving? For the high-net-worth individuals and couples who still face the prospect of the estate tax, knowledgeable advice on planned giving may be more important than ever. Tax professionals can benefit by preparing to help donors consider how best to take advantage of various  approaches to planned giving. A tax adviser may also remind donors that the current higher exemption amounts are scheduled to sunset on December 31, 2025. This means that some estates not subject to tax under current rules may be subject to tax in the future. Changes to tax laws and policies often call for planned giving strategies to be revisited.

Approaches to Planned Giving

Planned giving can meet the different needs of donors based on their overall financial plan while ensuring a charitable legacy. Common approaches to planned giving include donating appreciated assets and establishing charitable remainder trusts, charitable lead trusts, donor-advised funds and private foundations. Tax professionals can help clients employ these strategies to reduce their tax burden and enjoy other benefits during their lives.

Donating Appreciated Assets

Outright gifts of appreciated assets in place of cash represent a straightforward approach to planned giving. By donating assets that have appreciated in value, donors may receive double benefits. They can have the full current value of the assets that they donate deducted from their taxes; and, they can avoid taxes that would have been due on capital gains had they sold the appreciated assets themselves and then donated the proceeds to charity.

Charitable Remainder Trusts

A charitable remainder trust enables donors to generate income while contributing to their charitable organization. Donors and their loved ones can receive annual payments from a charitable remainder trust. When the term of the trust expires, the remaining assets go to specified charities.

Upon funding of a qualified charitable remainder trust, donors can take a partial deduction. The deduction amount is calculated on the remaining distribution of trust funds to the charitable organization. An additional benefit: proceeds from the sale of assets held by tax-exempt charitable remainder trusts are not subject to capital gains taxes.

Charitable Lead Trusts

Like charitable remainder trusts, charitable lead trusts make annual payments. The difference is that the payments go to charities, and the remainder of the trust’s assets at the end of the term goes to the donor’s family members or other beneficiaries. Financial benefits for donors may come in the form of an estate tax deduction.

Donor-Advised Funds

Donor-advised funds give sponsoring charitable organizations full authority over funds donated. Donors can make recommendations and add contributions over time. Despite having limited control, many donors find this form of planned giving advantageous for how easy it is to set up, the confidentiality it provides by channeling gifts through a fund, and the tax savings opportunities.

Private Foundations

Private foundations are nonprofit organizations that provide donors and their families more control over their donated assets. Private foundations provide an avenue for charitable giving over multiple generations. Funds donated to the foundation can provide immediate tax savings even though the money may not be used until later. Despite the complexity of running a private foundation, donors and their families may be willing to run these organizations to benefit multiple charitable organizations and have more control.

 

Estate Planning Options for Lifetime Giving

Tax professionals with a thorough understanding of planned giving can help reduce or eliminate estate taxes for their clients through effective estate planning options. These include annual exclusion gifts and charitable gifts.

 

Charitable Gifts

Charitable gifts offer a simple vehicle for minimizing estate taxes because they are deductible from a donor’s taxable estate. This method of giving can be appealing, but in some cases a planned giving approach may make more sense. Suppose a client wants to donate a primary residence to charity but does not want to move. Guided by a professional, the client could agree to transfer the home to a charitable organization, creating an opportunity for a tax deduction, and retain the right to live in the home. The donor realizes tax savings; the charity can plan to receive a valuable asset.

 

Take Your Practice to the Next Level

Planned giving, which can benefit both donors and charitable organizations, is a key component of the ever-evolving estate planning landscape. Changes to tax laws can impact the financial aims of donors and affect their estate planning strategies. Tax professionals with a thorough understanding of estate and tax planning can help clients meet their goals.

Villanova University’s  Master of Laws in Taxation and Master of Taxation programs provide graduates with a deep level of practical expertise to help guide individuals through the complex tax and other related implications of planned giving. Along with courses in wealth tax, trusts and charitable gift planning, among other topics, each program offers an estate planning certificate that can be earned on its own or in conjunction with a master’s degree. Learn more about how the  Master of Laws in Taxation  and Master of Taxation online programs and the estate planning certificate at Villanova University can prepare tax professionals to help their clients understand their options for planned giving.

 

Recommended Readings

The Digital Economy and Tax Law: How Technology Affects Regulation

The Benefits of Earning an Estate Planning Certificate

How Lawyers Can Benefit From a Master of Laws in Taxation

Sources:

Charles Schwab, “The Estate Tax and Lifetime Giving”

DonorsTrust, “The Portfolio Approach to Planned Giving”

Eide Bailly, “Lifetime Gifts: An Effective Strategy for Estate Tax Planning”

Fast Company, “Being Generous Makes You Happy—and Makes Your Kids Generous, Too”

Fidelity Charitable, Charitable Remainder Trusts

Forbes, “5 Tax Strategies to Tax-Optimize Charitable Giving”

Gallup, “Percentage of Americans Donating to Charity at New Low”

Greensfelder, From Simple to Sophisticated: Top 10 Planned Giving Techniques

Maxwell, Locke & Ritter, Planned Gifts Hold Tremendous Promise

National Philanthropic Trust, Want to Improve Your Health in 2020? Give More.

PG Calc, “Tax Reform and Its Impact on Planned Giving”

Planned Giving Design Center, “How the New 2018 Tax Law Makes Planned Giving More Powerful”

PlannedGiving.com, Tax Details

PlannedGiving.com, What Is Planned Giving?