December 2024
Here are some key takeaways from their conversation:
Watch previous episodes here:
Ep. 114 Liquidity: Blessing or Curse?
Ep. 113 Replacing Income in Retirement
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski joined by Wealth Advisor and Partner Mike Rudow. Thanks for joining us.
Thanks for having me. This is, I love the new set up.
It's kind of fun. It's a little bit different.
I'm used to having the desk in front of us, but this is cool. I feel like, you know, we can hug in the middle of this. Nothing's stopping us.
We could definitely do that.
Mike, instead of just hugging, we're here to talk about charitable giving strategies that people can sort of, take advantage of, if you're charitably inclined. But it's some of the conversations that we have often with clients about ways to save and help them make more money.
Yeah, absolutely. And there's a lot out there that you can use from a charitable giving perspective. So understanding, you know, what the right vehicle to use based on your goals is, is important. And that's that's why we're here. Our clients, most of them are charitably inclined. They want to do good with the money that they've made.
But they also want to benefit from that. So understanding where their opportunities are and what the right vehicle for them is is important.
And so as we near out the the end of the year, obviously required minimum distributions are a big part of this year. So for clients that are over the age of 73, we're calculating their required minimum distribution and helping make sure that they take out at least that amount. Qualified charitable donations, also known as QCDs.
This is a great way to, obviously give to the charities that are important to you, but also reduce the income.
Let's talk a little bit about QCD.
So when you have a QCD and you're of age, right, you're forced to pull out a certain amount, a fraction of your, you know, your retirement account so that the IRS can receive that tax money. Right? So when you pull that out, that's ordinary income, you're paying that tax. And then you can distribute the rest as you want.
You can reinvest it into a taxable account. And you could spend that money. And some people have really large RMDs. And for those who are charitably inclined, one option is you could take that distribution from the IRA and go straight to a charity, which is that qualified distribution. And from there it's never taxed. You're never paying tax on that income.
So when you're making a larger benefit to the charity, because if it's $100,000, they're receiving $100,000, they're not receiving $70,000 because 30 went to the government. And two, it could offset income for their that's income that you don't have to pay taxes on. Now. Right. So it's a really good strategy, especially for people, who are using the standard deduction.
Right. If they don't have a lot of other deductions. But that standard deduction being at 30,000 if you're a married couple, you still get that 30,000 Sanders option, but now you're also not paying taxes on that qualified distribution.
And so some key points on this qualified charitable distribution. So you have to make sure that the money goes from your IRA directly to the charity. So the check is made out to that charitable organization. The limit for qualified charitable distributions in a year is $100,000. So if your required minimum distribution for the year's $200,000, and you do 100,000 as qualified charitable distributions to 1 or 20 organizations, you've maxed out that limit.
Yeah. The other key thing to note is that when you get your 1099 are at the end of the year, it's just saying how much was taken out of your retirement account. You still have to let your CPA know that you used a portion or all of it to satisfy a qualified charitable donation, just as if you wrote a check, out of your check.
Yeah. You got to make sure that your advisors know what your strategy is so that you could probably report it. Yeah, absolutely.
Besides qualified charitable distributions, what are some other, you know, charitable giving strategies that you like to deploy?
Well, you've got things like charitable remainder trusts, and things like DAFs, donor advised funds. A charitable remainder trust is a great, tool because one, if you're looking for income, this is a tool that will allow you to contribute to a charity, maintain some sort of control. As far as, investability, but still have income to the beneficiary.
So how that works is you set up this irrevocable trust, you will contribute X amount of money, which is immediate tax deduction. Right. So you're going to benefit from reducing your income. And then from there you could set up a beneficiary that will have then an income stream going for with a minimum 5% paying off of of that initial distribution.
And the rest of it will get to grow over time. And then you're going to have a charity beneficiary or multiple charity, beneficiaries at the end of the term of that trust. So the trust will will make sure that it owns the, the assets, you know, that you're going to have the beneficiaries at the end. So you're doing good, but it allows you to still get income for you or your family, while getting that immediate tax deduction.
So let's say you've got a higher income year or you've got and you're above the estate tax exemption or you've got an asset, whether it's a stock or a piece of real estate, that's just gone up a lot in value. Most people don't want to sell those assets and they have to pay capital gains for. And so those are the best assets to be able to use to set up a charitable remainder trust.
Let's say you fund it with $1 million of appreciated stock. It can be sold within that charitable remainder, trusting you don't have to pay any capital gains tax. But then you, as the person that contributed it, could receive that $50,000 a year of income stream off of that charitable trust. So it's a way to get money out of your estate to benefit the organizations that you want, but still receive an income stream during your life because you might need it.
And that's a great point with, appreciated assets, right? When you're holding on to assets that you've been holding for a long time, most likely, especially with, you know, the market that we've had over the last 15 years, you've got a low cost basis, and now a large value. And if you have to sell those assets, you're going to be paying a large capital gain.
But to be able to contribute it to something like a charitable remainder trust, where you're going to get full credit for, you know, the the value of that asset at the time, be able to reduce income, but also create an income stream for the beneficiary. Like it's a really good strategy, especially with appreciated assets. Yeah, I really like that.
And then you mentioned donor advised funds, which, those are one of my favorite types of, of accounts. I mean, I, I view a donor advised fund is like your own personal charitable account, right? Yeah. It's like having your own savings account or checking account, but you don't have to fund it with a lot of money.
And so you can use cash, you can use appreciated securities. But the benefit of using assets or even part of your business sale or a complex, you know, asset like a real estate sale, if you did it with enough planning, you could take a portion or all of that and funded donor advised fund. You get a tax deduction that year.
It's as if you gave the money away that year, but now you've got an
account that you can invest and grow the money and give it to the charities or the organizations that you would like to over time.
Yeah. The key word of that is flexibility. When you're thinking about a donor advised fund, if you're someone who's charitably inclined, but you you want to have optionality, you want to flexibility. You want to know that you could benefit multiple charities. And you don't have to know which charities this day. It's the perfect fund for that.
It's also great for for business owners who are looking to transition their business. Right. And they want to be able to offset some of the, the income that they've got coming in from the business or from that potential sale of the business. They could open up a donor advised fund, they could contribute shares, appreciated shares of their of their business into that fund.
And then eventually those get sold and those can be reinvested, created and then, you know, given out to different charities at different times. But it's an estate planning strategy. It's a tax mitigation strategy. There's a lot of benefit for a donor advised when the key is though, if you're going to use that for reduced income, taxes, you have to plan early because you've got to be at a phase that's before an Loi, like a letter of intent.
So if you are a business owner and you do want to contribute to a fund like that, you've got to make sure that you're contributing before that, the process of the sale of the business is really underway.
One of the other reasons why I like donor-advised funds is because it's a way to kind of pass along your own personal and family values to your future generations. You can set up this giving account and then you can sit around with your kids and grandkids, and you can show them how not only you can invest it and grow it, but how easy it is to make a donation to an organization that you know you want to support or they want to support.
Yeah, it's a way to kind of bring people in together.
You're right. And but it's also a way of protection in the sense that, like, I have a lot of clients who are very charitable inclined and they're fearful, they're like, well, I want to make sure my kids continue to give to charity when I'm gone. And one of the ways that you can do that is by contributing to that donor advised- that's its own trust.
It owns those assets now. So then even when you pass away, the next generation will then have the ability to manage that and decide which charities. But they can't pull that out for their own benefit. Right, right. So it kind of ensures generational giving, which gives peace of mind to a lot of our clients.
Yeah. I love being able to set up successor participants. So that way, if something were to happen to me, then my kids are now the owners of that account, even though the beneficiaries in the end will be charities. But they can then make decisions and see that money go out. And then you know, that money ultimately is has to be done for good, right? It has to be, benefiting the the less privileged, sir.
Look, next week, Amber and I are going to do an episode on sort of like a year end checklist, things to consider whether it's maxing out retirement plans, tax loss harvesting. We're going to talk about qualified charitable donations and some other giving strategies. But today, you know, just to kind of break it down, we talked a little bit about qualified charitable donations. That's sending money directly from your IRA to the charity. So that way you don't have to realize the income. Yeah. The other two that we talked about was the charitable remainder trusts and donor advised funds. Those are things that you want to look at in terms of being able to give money to charities, help offset larger income years, or even just be able to pass along, you know, family values, you know, in the long term.
But all three great ways to kind of help the discussion around charitable planning, charitable giving and instilling the values that you and your family have. So, Mike, thank you so much for joining us.
Disclosures: The information presented herein is for educational purposes only and isnot intended to constitute financial advice. The views and opinions expressedby the speakers are as of the date of the recording and are subject to change.It should not be assumed that Morton will make financial recommendations in thefuture that are consistent with the views expressed herein. Past performance isno guarantee of future results. You are encouraged to seek tax and/or financialadvice from your financial advisor and/or tax professional to thoroughly reviewall information before implementing any transactions and/or strategiesconcerning your finances
