Tax-Efficient Donations for High-Net-Worth Individuals

Are you a high-net-worth individual (HNWI) with concerns about how income taxes, capital gains taxes, and estate or inheritance taxes can chip away at you and your family’s finances? People can leverage several strategies, including charitable giving, to potentially reduce their tax obligations. An experienced estate planning attorney can help you identify tax-efficient giving to charity that provides potential tax advantages while supporting the causes you care about.

Done correctly, strategic philanthropy for high-income earners can help you preserve more of your wealth and leave a lasting legacy of gifting. At 453 Trust Powered by Pennington Law, our experienced team can review your financial position, discuss your priorities, and develop a unique strategy to fit your needs.

Serving clients nationwide, our team includes nationally recognized attorneys, financial advisors, and tax planning professionals who can help you with philanthropic planning and how to leave a meaningful charitable impact. Contact us today for a complimentary consultation.

Charitable Giving Strategies for Ultra-High-Net-Worth Families

There are several charitable giving strategies that ultra-high-net-worth individuals (ultra-HNWIs) can use to manage their income and estate taxes. Some of the most common include:

• Direct charitable bequests: Wealthy individuals may make direct contributions to philanthropic causes through bequests in their will. These direct charitable bequests can provide estate tax deductions for families. Furthermore, including a charitable bequest in your will allows you to change beneficiaries during your life without making any immediate changes to your income, wealth, or lifestyle.
• Charitable remainder trusts: With a charitable remainder trust, you can create an income stream for yourself and your family member for the duration of your life or for a set term of years. At the end of this term, the trust donates any remaining assets to selected charitable causes. CRTs allow individuals and families to defer capital gains taxes on assets placed in the trust, obtain partial tax deductions for the set charitable remainder, and reduce estate taxes.
• Charitable lead trusts: A charitable lead trust operates in reverse to a CRT, providing charities with donations for a designated period, with the remaining assets in the trust distributed to designated beneficiaries. CLTs can offer tax reductions on generational wealth transfers, especially when passing on assets expected to increase substantially in value.
• Donor-advised funds: In a donor-advised fund, an individual or family creates a charitable investment account and makes an irrevocable contribution of assets. The donor receives an immediate charitable tax deduction (subject to applicable limits) and can recommend philanthropic organizations for the fund to donate to.
• Philanthropic foundations: Families can also establish private foundations to which they contribute and through which they can direct a long-term charitable giving strategy.

Why Tax-Efficient Giving Matters for High-Net-Worth Individuals

Tax-optimized charitable giving offers a number of crucial benefits to high-income and HNWIs. High incomes can place an individual into higher tax brackets, which can tax income at substantial rates. Tax-efficient giving can provide deductions that mitigate a high-net-worth individual’s tax burden.

When HNWIs own assets that have substantially increased in value (such as stocks and real estate), selling those assets can expose their owners to capital gains taxes at rates as high as 20 percent federally, plus applicable surtaxes and state taxes. Fortunately, there are various tax strategies for wealthy families that can defer, reduce, or minimize capital gains taxes on appreciated assets.

How Charitable Donations Reduce Tax Liabilities

Charitable donations can reduce tax liabilities for individuals and families in various ways, depending on the nature of the donation. Specific donations can help donors offset capital gains taxes on appreciated assets by donating them to charitable causes. Charitable giving may allow donors to claim income tax deductions, which can help reduce their taxable income. Finally, donations can also provide exemptions or reductions in federal estate taxes and state inheritance taxes (if applicable).

Reporting Requirements and Documentation for Charitable Donations

Under federal tax law, donors must obtain a contemporaneous written acknowledgment from a charitable organization for any single monetary or noncash contribution valued at $250 or more before they can claim a charitable deduction on federal income tax returns. The acknowledgment must list:

• The name of the organization receiving the donation
• The date of the contribution
• The dollar value of the contribution
• A description of donated property
• A statement certifying that the organization did not provide goods or services to the donor in return for the contribution, or a description of the goods and services provided by the organization

The donor must receive the written acknowledgment on or before the earlier of the date on which the donor files their income tax return for the year of the contribution or the due date for the return.

Additional rules may apply to the donation of specific items, such as automobiles. Individuals seeking to make large charitable contributions should consult an experienced attorney for guidance on complying with Internal Revenue Service rules for charitable giving.

Private Foundations and Long-Term Philanthropic Control 

High-net-worth families may also establish private foundations to maintain long-term control over the family’s charitable giving. A private foundation functions as a legal entity independent of the individual or family that founded it. However, founders can retain significant control over the management of the foundation’s assets and investments, as well as its grant-making activity, allowing them to ensure the foundation maintains their philanthropic vision. Private foundations can last indefinitely, allowing succeeding generations to assume responsibility for carrying out the family’s charitable mission.

Estate Planning and Legacy Benefits of Charitable Giving 

Individuals can incorporate charitable giving into their estate plan to serve several objectives. First, including philanthropy in an estate plan can help mitigate the tax implications of passing wealth to surviving family members, thereby preserving more of a family’s generational wealth. Effectively implemented charitable giving strategies can also help individuals leave a positive legacy by using some of their wealth to further philanthropic causes they care about.

Year-End Giving Strategies to Reduce Tax Burden on Donations for HNWI

When HNWIs anticipate having large tax bills for the year, they may undertake year-end charitable giving strategies to limit their tax exposure, such as:

• Contributing to a donor-advised fund
• Donating appreciated assets to defer capital gains taxes and obtain a tax deduction
• Making a qualified charitable distribution from an IRA, which can help meet the required minimum distribution and avoid income tax on distributions (applicable only if you are aged 70½ or older and up to set annual federal maximums)

Contact Our Wealth and Estate Attorneys for a Personalized Donation Strategy

Charitable giving for wealthy donors is a viable strategy for people who have supported certain organizations in their lifetime and wish to continue doing so while enjoying potential tax savings. Contact 453 Trust Powered by Pennington Law today for a free consultation with an experienced estate planning attorney to discuss strategic philanthropy for high-income earners.