Gifting in a Volatile Market

Gifting in a volatile market

During times of market volatility, it’s important to review your charitable options and opportunities.

The coronavirus has financially impacted individuals and businesses, and market volatility may leave you cautious about making gifts. However, lower valuations can offer certain tax advantages, and temporary pandemic relief legislation is designed to promote charitable giving as well.

Annual exclusion and lifetime gifts

This is a good time to make annual exclusion gifts (up to $15,000 per person). Using marketable securities when volatility is high and valuations are down can provide for extra tax advantages on these gifts.

Making larger gifts with low value securities allows a taxpayer to remove assets from the taxable estate while retaining more of the estate tax, gift tax, and generation skipping transfer tax exemptions (currently $11.7 million). Investors who have concerns that the exemption will be lowered with possible changes in legislation should consider consuming a larger portion of the exemptions sooner rather than later. The IRS will not recapture these gifts if the exemption is lowered.

Charitable giving

As in 2020, COVID-19 relief legislation provides incentives for charitable giving in 2021.

For taxpayers who itemize, the charitable cash contribution limit is still increased to 100% instead of the standard 60%. The taxpayer must make an election. The existing five-year carryover rule remains in place, and the election would allow an increased amount to be deducted in 2021 and less carried forward.

For corporations, the percentage limitation on the corporate income tax charitable deduction is still increased from 10% to 25% of the corporation’s taxable income for 2021. In the case of charitable contributions by partnerships or S corporations, each partner or shareholder must separately elect to use the modified percentage limitations.

For taxpayers who take the standard deduction, the act allows an above-the-line deduction for cash contributions up to $600 for married couples filing jointly who aren’t itemizing. In order for the contribution to be deductible, it must be given to a charitable organization described in Internal Revenue Code section 170(b)(1)(A).

These incentives are only available for cash contributions and are not available for contributions to private foundations, supporting organizations and donor advised funds.

Charitable remainder trusts (CRT): Funding a charitable remainder trust with highly appreciated stock can solve capital gain tax problems and allow tax-efficient investment diversification. The CRT can sell appreciated assets and the donor avoids capital gains tax. To the extent capital gain income is paid to the donor, it is spread out over time.

Retirement planning: The suspension for required minimum distributions under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has expired, but the increased adjusted gross income (AGI) limitations for cash contributions provides an opportunity for individuals between 59½ and 70½ to have benefits similar to a qualified charitable contribution. They can take a cash distribution from their IRA and donate the cash to charity to offset a larger portion of their income taxes.

High-net-worth strategies: High-net-worth investors with appreciated assets should consider combining giving strategies to maximize gift tax benefits.

  • Make larger donations in cash to charity.
  • Consider gifting through a donor advised fund, donating long-term appreciated assets to minimize capital gains and maximize the 30% AGI limits for appreciated securities.
  • Plan for future giving and take advantage of the increased AGI percentage limit by additional cash gifts to a donor advised fund.
  • Use a combination of strategies to help take full advantage of the increased AGI percentage for gifts and receive tax savings on long-term appreciated assets.

The CARES Act has created a number of opportunities for charitable planning. Talk to your financial advisor to learn more about charitable opportunities during times of volatility.

Diversification does not guarantee a profit nor protect against loss. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.