Broker Check

Let's Talk About Legacy

| April 28, 2022

Legacy can be a subjective, even philosophical topic. What should be handed down to the next generation and how should a person or family be remembered? When it comes to financial legacy, often a critical part of the definition revolves around generosity and charitable intent.

When looking at long-term charitable or philanthropic giving, this is normally when the concept of private foundations would come up, but their costs and requirements are historically restrictive for most families. The massively wealthy are not the only ones interested in sharing good fortune with those less fortunate.

Let’s explore a few strategies that can be used to by those interested in charitable giving.

Donor Advised Funds

A Donor Advised Fund (DAF) is a single “giving vehicle” established at a public charity. Donors make irrevocable charitable contributions, receive an immediate tax deduction, and recommend grants from the fund to qualified charities over time. While they were created in the 1930s, they really did not grow in popularity until the 1990s. Their flexibility and cost-effectiveness, along with the ability to maintain a relationship with your financial advisor, make these great options for all levels of gifting.

So how might the use of a DAF work in practice? Take the example of John and Susan. They have four adult children and five grandchildren. They have worked hard to instill a generous spirit in their children, and they want to continue that with grandchildren as well. John and Susan, both now age 70, opened a Donor Advised Fund with $50,000 worth of appreciated stock six years ago, and have funded it each year with $5,000 in cash. The DAF has grown to $100,000.1 

As a goal of their retirement, they invite their entire family on week-long vacation once per year. This week is full of fun and connection, as well as one day dedicated to giving. In the morning, they all go out and serve the community in some small way, and in the afternoon, they ask each child and grandchild to make presentations to the entire family of charities that they believe are worthy of a grant from their DAF. The family then votes on which charities will receive a designated amount of grants to be distributed that year. John and Susan have found that this combination of serving and giving has not just been bonding but working to impart a heart for philanthropy in their family. For those who have a charitable spirit, but not the means or desire to create a private foundation, a DAF might be just the right giving vehicle to provide the legacy they want.

Gifts of Appreciated Stock

Some investors have long-standing stock positions that have significant capital gains. Whether these positions were gifted to them or were a piece of compensation as an employee at a company, large capital gains may be on the horizon if sold. When looking at assets from which charitable contributions can come, consider an in-kind gift to charity (or even a Donor Advised Fund as mentioned above). As the giver, you could take a tax deduction for the full market value of the gifted security, and at the same time the charity is able to sell the gifted stock without realizing any taxable gain. This can be a real win-win for both the giver and the charity receiving the gift.

Qualified Charitable Distributions

Individuals age 70½ or older, who do not need to take distributions from their IRA to meet their expense needs, can choose to give up to $100,000 per year to charity from their IRA. By doing this, a portion or all of a required minimum distribution is met, and if the distribution is paid directly from the IRA to the charity (without first going to the IRA owner), the gifted amount is not included in gross income. This can be a big win for retirees who may not get the tax deduction from a regular charitable donation due to the increase in the standard deduction. This way the giver still receives a tax benefit for their generosity, regardless of if they itemize their deductions or not.

Do any of these strategies fit your financial situation and interest in sharing your wealth? We are always here to answer questions or assist in any way.

1 This is a hypothetical example and is not representative of any specific investment. Your results may vary.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax advisor.