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Charitable work is an important part of many people's lives, whether through financial contributions, dedicating time and talents, or a combination. It’s also a great way to establish your legacy and set a precedent for future generations.
For high-net-worth families, it's essential to have a strategic plan, so you and the organization get the most out of your charitable gifts.
Here are a few smart ways high-net-worth families can be more intentional about their giving, including qualified charitable distributions and donor-advised funds.
First, Create A Charitable Giving Plan
You should view charitable giving as another component of your overall financial plan. And if you're nearing retirement, charitable giving should always be integrated into your high net worth retirement plan because it impacts so many different areas of your finances.
Like your retirement, estate, and taxes, creating a defined strategy that guides your giving is essential. Doing so brings more intentionality and purpose to the practice.
One of the most significant parts of charitable giving is planning for it. Why?
Because it forces you to think deeply and critically about the organizations you want to support, how much you want to give, and the most strategic ways to do so.
To create your plan, you’ll need to consider the types of organizations you want to support. You might do this by yourself, with a spouse, or include other family members. Is your desired organization of choice a qualified 501c3? You’ll want to check to be sure so you can take advantage of tax benefits.
Also, think about how much you plan on giving each year. The amount may fluctuate yearly, but if you have an idea in mind, you’re more likely to follow through and have something to plan with. That last part is key because charitable gifts affect your larger plan, namely regarding tax planning.
It's also important to think about how you donate. Work to prioritize giving in the most effective ways possible—which is seldom writing a check or donating cash. You’ll want to ensure the ways you give accomplish two primary goals:
Increase the value of the gift to the charity, and
Lower your taxable income.
Let’s explore some of those methods in more detail.
Pro tip: It’s important to note that you don’t have to report your charitable gift to the IRS via the annual gift tax exclusion. The rules work differently for charitable contributions. An individual can deduct up to 30% of their AGI if gifting non-cash assets that were held for at least a year to a public charity.
Donate Appreciated Assets
As a high-net-worth individual, it’s important to understand the impact of properly managing gains and losses in taxable investment accounts. Harvesting losses to offset realized gains, the wash-sale rule, and maybe even strategic tax-gain harvesting during a low tax year are all things you or your advisor should understand.
But if you are charitably inclined, did you know you have another tool that may be even more tax-efficient?
If you have an investment with a significant unrealized gain, you might consider donating that appreciated security directly to your charity of choice.
That’s because when you donate assets to charity, you aren’t required to pay taxes on any unrealized gain. You'd be able to give more than if you sold the asset, paid taxes on the gain, then donated what's left. Or, you can give the same amount you otherwise would have but avoid a tax bill. Either way, you and the charity are better off.
Of course, the charity won’t have to pay any taxes when they sell the asset either!
Gifting appreciated securities is an excellent way to give to causes you care about while managing your tax liability. This strategy is beneficial if you itemize deductions because you can deduct the donation's fair market value.
Consider a QCD
A qualified charitable distribution (QCD) is a donation from an IRA to a qualified charity. It allows you to donate up to $100k ($200k for a couple) without including the distribution in your taxable income.
Unlike many tax benefits, you don't have to itemize to take advantage of a QCD. A QCD isn’t really a deduction but prevents the distribution from being included in your taxable income in the first place, so it's perfect for people taking the standard deduction.
QCDs can count as your RMD too, so it can be a great way to manage taxes in retirement. By donating all or a portion of your RMDs, you reduce your income tax and can give more to charity. If RMDs push you into a higher tax bracket, consider donating a portion to keep you in a more modest tax bracket.
But QCDs do come with drawbacks, and you shouldn’t complete one in a vacuum. In some cases, you might be better off taking the distribution from your IRA and offsetting the gain by donating an appreciated asset worth even more.
Although the QCD is a simple strategy that can make a big impact, high-net-worth individuals often fail to implement it correctly. We see this all of the time when working with high-net-worth clients. To help, here’s a free cheat sheet on how to implement a QCD the right way. Working with a financial advisor is a great way to ensure you’re executing this tool correctly.
Open and Contribute To a DAF
A donor-advised fund is like a charitable investment account. To fund a DAF, you donate appreciated assets, cash, collectibles, real estate, or other investments into a designated account. The gift is considered “complete” once you fund the DAF. You can’t take the money back, but you get to direct the investments and choose when designated charities receive distributions. The money in the account grows tax-free, increasing what the charity ultimately receives.
DAFs are a good way to bunch donations so you can itemize. Let’s look at an example of how bunching works.
Suppose you plan to donate $20k per year to a charity, but your itemized deductions fall short of the standard deduction of $5k. You don’t get any tax benefit from your annual donation.
If you’re able, you could contribute several years' worth of gifts to the DAF in a single year, say $60k, and then direct distributions to the charity over the next three years.
Donating in this way allows you to clear the itemization hurdle and claim a larger deduction.
DAFs can be anonymous, helping you maintain privacy, but there are some downsides to consider. They can be expensive to maintain with administrative, management, and investment fees and often have high account balance minimums.
Why Giving Money Away, Now Will Help Your Estate Later
While charitable giving plays an important role in your personal and financial strategy, it can also be helpful in estate planning.
Estate taxes may not be high on your list of concerns right now, given that the federal estate exemption sits on a tall chair of just over $12 million (double for married couples). But, it will return to $5 million when the Tax Cuts and Jobs Act expires in 2026 unless new legislation is passed.
Giving money intentionally provides tax benefits now, but it also sets you and your beneficiaries up for even more tax efficiency later.
There are also several estate planning vehicles that can catalyze your charitable efforts, including a grantor retained annuity trust (a GRAT), charitable remainder or charitable lead trust, defective grantor trusts, and other irrevocable trusts that will streamline the wealth transfer process all while bringing your charitable giving legacy to the next generation. Keep in mind that these strategies are incredibly complex so you may benefit from the assistance of a certified fiduciary financial planner.
Our wealth management firm specializes in helping high-net-worth families find financial freedom through comprehensive retirement planning. If you’d like to get started on a more tax-friendly giving strategy and ensure your gift is making as much impact as possible, give us a call. We’d love to help you.
About Scott Hurt, CFP®, CPA
Scott is a personal financial advisor with Covenant Wealth Advisors, a fee-only financial planning and investment management firm. He advises individuals age 50 plus on retirement income planning, investing, and tax planning strategies for a successful retirement.
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