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Charitable Giving Within Your Wealth Management Strategy

The act of giving has been part of the human race since ancient times. The first known charitable gift was in 2500 BCE (before the common era), when ancient Hebrews used mandatory taxes to benefit the poor. In 500 BCE, the word philanthropy first appeared in the drama “Prometheus Bound” by Aeschylus; it has a Greek root, and its literal definition is “love of mankind.”

Here’s a brief history of giving in the U.S. from the National Philanthropic Trust:

  • Plymouth, Massachusetts (1620): Native American Squanto of the Patuxet tribe teaches pilgrims how to grow Indian corn and shows them where to fish. His act of kindness helps the settlers survive the winter and reflects the longstanding Native American cultural tradition of giving and reciprocity.
  • Cambridge, Massachusetts (1638): John Harvard donates his library to a university, later to be known as Harvard University. Harvard was the first institute of higher education in the U.S.
  • Boston, Massachusetts (1710): Cotton Mather publishes “Essay to Do Good,” in which he encourages men and women to engage in ongoing attempts to do good in the world. Mather, who dedicated his life to supporting charitable causes, is known as the father of individualistic, voluntary tradition of American philanthropy.
  • 1829: British scientist James Smithson passes away and leaves his estate to the U.S. Smithson never visited the country, and his motivations remain mysterious. The U.S. Congress uses the bequest to form the Smithsonian Institute in 1946.
  • 1913: The U.S. Congress passes the Revenue Act of 1913, allowing organizations devoted to religious, charitable, scientific, or educational purposes to be exempt from paying federal income taxes.
  • 1936: The U.S. Congress passes the Revenue Act of 1936, adding an exemption from taxation for charitable gifts.
  • 1953: The U.S. Supreme Court rules the A.P. Smith Manufacturing Company can make charitable contributions to Princeton University. Prior to this ruling, companies were only able to give to causes that would directly benefit the company.
  • 1954: General Electric is the first corporation to start a gift-matching initiative. 
  • 2010: Bill Gates, Melinda Gates, and Warren Buffet pledge to give away 99% of their personal fortunes. They start the Giving Pledge Campaign, which encourages the wealthiest individuals and families to pledge most of their fortune to philanthropy. By 2014, over 125 pledges are made.

These are just a few examples of charitable giving through time in the U.S.

Tax-Planning and Investment Management Benefits

At CPWM, our team of financial planners helps clients with charitable donations regardless of how big or how small. Below are some examples of how we can help integrate charitable giving into clients’ wealth management strategy and identify additional financial planning opportunities:

Using Assets in IRA or Inherited IRA Accounts

Per IRS rules, the maximum amount of money an individual can transfer from an IRA account to charity is $100,000 per year. From a tax planning perspective, this type of distribution is particularly attractive for clients who need to take their RMD (requirement minimum distribution) but don’t want to increase their income tax liability. Charitable distributions out of IRA accounts do not count toward taxable income if they go straight to a qualified charity.

Creating a Charitable Giving Account

An asset manager may recommend this type of tax-efficient account to a client who may experience an unusually high-income tax year and desires to distribute assets to charities over a long time horizon. Per the IRS, the maximum amount of money individuals can deduct for charitable contributions is 60% of their adjusted gross income.

  • Great way to donate highly appreciated securities
  • Tax deduction is created when money is moved into the account
  • Money in the account can be invested and will grow tax-free for future charitable distributions
  • No limits on the amount or frequency of transfers out of the charitable accounts
  • Upon your passing, the assets in the account are distributed to the charities you choose
  • Great way to involve younger generations in charitable giving
  • Accounts are held with a custodian
  • Once assets are transferred into a charitable account, the transfer is irrevocable
  • Tax deduction is only taken when the money is transferred into a charitable account
  • These types of accounts can only be used with after-tax money
  • Cost for account maintenance and management

Private Family Foundations

The most suitable clients for these types of accounts are individuals and families with substantial wealth and a desire for multi-generation giving. These are the most complex accounts for distributing wealth to charities, but they offer the most control over grant-making and the ability to involve multiple generations in decision-making.

At Columbia Pacific Wealth Management, we do not offer tax advice, but our wealth consultants work closely with our clients’ CPAs and tax advisors when there is a philanthropy need or desire to create a charitable plan. We also guide clients through seasonal financial and tax planning opportunities related to charitable giving, such as at the end of the year. Please reach out to your financial advisor if you have any questions or want to learn more about our holistic approach to wealth management when creating your charitable giving strategy.

Other sources: IRS, charitable giving brochures from Charles Schwab and Fidelity

Important Disclosure Information:

Different types of investments involve varying degrees of risk, including the risk of loss of your entire investment. Past performance is not indicative of future results. All opinions expressed herein are current only as of the date hereof and CPWM and its employees can give no assurance that the performance of any specific investment recommendation or investment strategy discussed herein, whether directly or indirectly, will be profitable, or that it will be equal to any historical performance level discussed herein. The discussion or information contained herein is not intended to be, and should not be deemed as, personalized investment advice. The recommendations made may not be suitable for your specific individual situation and we encourage you to discuss with your financial professional before undertaking any investment strategy or recommendation contained herein. The discussions contained in this blog is current only as of the date hereof and may change due to a number of factors, including varying market conditions.

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