Planned Giving and Taxes - Knowing What You Don't Know

No doubt about it, Planned Giving is a fascinating area to work in. it’s right at the confluence of fundraising and estate planning, incorporating knowledge about investments and sensitivity to the life cycle stages that are part of the human experience. We’re helping organizations to raise money for causes we believe in, and we’re helping individuals to make the most efficient allocations of their income and wealth. One of the central and more difficult aspects of planned giving, however, is the dependence upon a variety of tax laws that affect every type of planned gift. Today’s gift planning professionals need to know more about the American tax system than ever before.

Common Tax Considerations

So what are some of the more common tax aspects that affect planned giving under the current conditions? Certainly, we all need to know something about income tax. Most Americans have to pay some amount of tax to the federal government based on their level of income, and typically, the state of domicile also requires ongoing tax payments and annual filings. The federal tax rates are progressive up to a certain point – the greater the annual income, the higher the rate of taxation, until they max out at a top number. Some states mimic this structure, while others levy taxes on income at a fixed percentage rate for all levels of income.

Capital Gains

Another common area of taxation is that of capital gains – when an individual sells an asset at a higher price than the price at which it was purchased, there is a gain – the appreciation in value – that becomes taxable upon realization. Capital gains are typically taxed at lower levels than income taxes, but they are still significant. Most Americans are subject to a 15% federal capital gains tax rate, and if they live in a state that taxes capital gains at 5% or more, they are looking at a combined tax rate of 20% or more. When a taxpayer sells appreciated securities or real estate, therefore, the capital gains taxes can be considerable.

Transfer Taxes

While income taxes and capital gains taxes apply to large numbers of people, transfer taxes apply to very few Americans. Transfer taxes exist in three forms: Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax. These have nothing to do with income or the profit on the sale of assets, but rather, they are based on amounts of money or property being transferred from one individual to another. There are large exclusions (in 2019, $11.4 million for single persons, and $22.8 million for married couples) that make this tax completely irrelevant to all but the wealthiest Americans. But gift planning professionals need to be at least generally familiar with how these taxes work, because typically, a certain portion of any charity’s donor base will be concerned about these taxes.

It would be impossible for any gift planning professional to master any of these areas of taxation, let alone take on any other more specialized areas of taxation, but actually, that’s not the biggest problem for the gift planner trying to incorporate tax aspects into the discussion. The biggest challenge in trying to come up with the most tax-efficient gift plans for a particular donor is that the gift planning professional simply doesn’t know very much about the donor’s personal tax situation – and likely never will.

An Example

Here’s an example: Does she or doesn’t she file a federal income tax return with itemized deductions? It’s a highly relevant question in the wake of the Tax Cuts and Jobs Act of 2017. Does she or doesn’t she know the cost basis of the stock she wants to use to establish a charitable gift annuity? No one else can ever really be sure of that information. And if she is at the top level of wealth, has she – or hasn’t she – used up any of her $11,400,000 lifetime exclusion amount from taxable transfers? It’s critically important to know if there is any exclusion amount left; there is no point in demonstrating how to “zero out the tax” on a charitable lead trust if there wouldn’t be any gift or estate tax in the first place.

But only the donor – and her tax advisor – truly know the answers to questions like these. The gift planning professional has to toe a very fine line to avoid giving tax advice or making recommendations that would NOT be most beneficial to the donor at hand. We will never be able to gather all of the relevant information that would be privy to a donor’s tax advisor. So what’s the solution? Ideally, we would get the donor’s tax advisor to be part of the conversation, but that tends not to be possible in most situations. Instead, we do the best we can without them. We learn as much as we can about generally how things work, and we make carefully qualified comments. And we always include the caveat that the donor should consult with their tax advisor on any matters of taxation.

Here’s something specific that may be of some help to you: PG Calc will be offering a special webinar on Thursday, August 29, at 2 PM EDT, to review the most common areas of taxation that are relevant to the planned giving discussion. We’ll provide an overview of each tax topic and explain how and why it matters. We hope you can join us!  You can register for the webinar here.

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