Charitable Trust

[2B]

I find myself about to receive a windfall that will be taxed as ordinary income. This will push my tax rate up and most of the windfall will be taxed at the 28 or 33% rate. Not wishing to give this to the tax man, I am considering ways to avoid the taxable income. A charitable trust through Vanguard came to mind as an option.

I am looking at depositing an amount that I currently intend to donate anyway over the next decade or so. Any appreciation inside the trust would increase the amount available and possibly extend it's life. So from a practical standpoint, this trust would reduce or eliminate my non-trust giving which effectively lowers my budgeted spending.

My questions are pretty simple I think but I'd like other perspectives.

1. Does anyone see any problems with using Vanguard's Charitable Trust to write individual donations to charities? I have multiple charities that I donate to.
2. Does anyone have another charitable trust platform they would recommend?
3. Does anyone see any problems taking a large charitable deduction in one year to do this?
4. Could I donate appreciated after-tax assets to this trust effectively eliminating future LT capital gains but taking the charitable donation on the appreciated amount?
5. Would anyone like to suggest another way to reduce the taxable income besides a charitable trust?

Thanks for any input.

 

[RE2Boys]

Do a search for past threads such as "donor advised funds" and "community foundation" for past threads on this subject. Also:

http://www.early-retirement.org/for...-clearinghouse-or-other-simple-way-63972.html

 

[jebmke]

I find myself about to receive a windfall that will be taxed as ordinary income. This will push my tax rate up and most of the windfall will be taxed at the 28 or 33% rate. Not wishing to give this to the tax man, I am considering ways to avoid the taxable income. A charitable trust through Vanguard came to mind as an option.

I am looking at depositing an amount that I currently intend to donate anyway over the next decade or so. Any appreciation inside the trust would increase the amount available and possibly extend it's life. So from a practical standpoint, this trust would reduce or eliminate my non-trust giving which effectively lowers my budgeted spending.

My questions are pretty simple I think but I'd like other perspectives.

1. Does anyone see any problems with using Vanguard's Charitable Trust to write individual donations to charities? I have multiple charities that I donate to.
2. Does anyone have another charitable trust platform they would recommend?
3. Does anyone see any problems taking a large charitable deduction in one year to do this?
4. Could I donate appreciated after-tax assets to this trust effectively eliminating future LT capital gains but taking the charitable donation on the appreciated amount?
5. Would anyone like to suggest another way to reduce the taxable income besides a charitable trust?

Thanks for any input.

We have done this on two occasions when our tax rate spiked. We use VG and it makes it easy to transfer appreciated shares to the DAF. Some don't like the $500 minimum grant but that doesn't bother us. We normally do smaller donations from our taxable account.

One added advantage of the DAF is that you can make donations anonymously. This can be helpful to keep your name off the donor lists that inevitably get passed around by various organizations.

 

[Gill]

You might want to be sure you don't exceed the annual limit on the charitable deduction.
Bruce

 

[jebmke]

You might want to be sure you don't exceed the annual limit on the charitable deduction.
Bruce

Good point. I always do ours in late December when I prepare a pro-forma tax return.

If the deduction is large, be prepared for an inquiry from the IRS asking for documentation of the deduction. We had this occur for our 2010 return. They requested documentation for everything on Schedule A. I sometimes wonder if I had included the docs with the original return, would they have accepted the return without question. But since I e-file everything, submitting supporting documents isn't easy. It requires a separate mailing and you are counting on the IRS to match up the docs in their systems.

 

[2B]

Good point. I always do ours in late December when I prepare a pro-forma tax return.

If the deduction is large, be prepared for an inquiry from the IRS asking for documentation of the deduction. We had this occur for our 2010 return. They requested documentation for everything on Schedule A. I sometimes wonder if I had included the docs with the original return, would they have accepted the return without question. But since I e-file everything, submitting supporting documents isn't easy. It requires a separate mailing and you are counting on the IRS to match up the docs in their systems.

The deduction if I go this route will be taken during a year with an unusually high gross income and AGI. It would only return to normal when you look at the taxable income. I can't imagine that this wouldn't pop out my return for closer scrutiny by any rational selection process they use.

I've had several dealing with the IRS over the years. It's been my experience that they are universally idiots that know less about the tax code than I do. At least, this has been my experience in how it relates to my situations. I've always been able to convince the first contact person that I wasn't committing tax fraud so I don't know if things get better up their food chain.

I'll have to look at how my charitable deduction could be limited by my income. I looked on the IRS site and this could be limited to either 50% or 30% of my income. If the 30% applies, that would be a problem. I was also planning to do some other things to maximize other deductions in this tax year.

 

[sunsnow]

We use Fidelity's Charitable Giving Account, and have no complaints. This account was funded one year when we had unusually large earnings, for the purpose you describe. One thing you might want to do is to verify that the charities you want to support are approved for donations with the charitable fund you are considering. I was surprised to find that one charity we wanted to support was not approved. I believe it was organized under the 501 code, but not 501(c)iii. There are, however, plenty of other acceptable alternative charities to support, so it was not a major problem, although it was disappointing.

 

[jebmke]

The deduction if I go this route will be taken during a year with an unusually high gross income and AGI. It would only return to normal when you look at the taxable income. I can't imagine that this wouldn't pop out my return for closer scrutiny by any rational selection process they use.

I've had several dealing with the IRS over the years. It's been my experience that they are universally idiots that know less about the tax code than I do. At least, this has been my experience in how it relates to my situations. I've always been able to convince the first contact person that I wasn't committing tax fraud so I don't know if things get better up their food chain.

I'll have to look at how my charitable deduction could be limited by my income. I looked on the IRS site and this could be limited to either 50% or 30% of my income. If the 30% applies, that would be a problem. I was also planning to do some other things to maximize other deductions in this tax year.

My experience with the IRS has been different. I prepare or review about 500-600 returns per year so I contact them frequently -- probably weekly during the tax season. I generally have a good experience with the IRS. It is true that not all agents are familiar with all issues. I normally start by describing the issue and asking to speak with someone who has experience with this. If you are dealing with complicated topics like international taxation, trusts, partnerships etc. you have to work your way to someone who has the expertise. They do exist -- just not as many as there used to be. For pension and IRA matters I always get them to connect me with their specialists.

This is going to get harder since their budgets have been hacked to pieces and the best folks have jumped out to private practice. Processing is going to be slower, errors increase , refunds delayed etc.

 

[samclem]

Does anyone have another charitable trust platform they would recommend?

Per the info in the thread referenced by RE2Boys, I'm using a local community foundation and it works very well. Donating appreciated assets is no problem.

1. Would anyone like to suggest another way to reduce the taxable income besides a charitable trust?

   I'm sure you've done all the normal things (maxed out tIRAs/401Ks, considered "bunching" deductions into this high-tax-rate year, etc). Other than that, no great ideas.

 

[2B]

My experience with the IRS has been different. I prepare or review about 500-600 returns per year so I contact them frequently -- probably weekly during the tax season. I generally have a good experience with the IRS. It is true that not all agents are familiar with all issues. I normally start by describing the issue and asking to speak with someone who has experience with this. If you are dealing with complicated topics like international taxation, trusts, partnerships etc. you have to work your way to someone who has the expertise. They do exist -- just not as many as there used to be. For pension and IRA matters I always get them to connect me with their specialists.

This is going to get harder since their budgets have been hacked to pieces and the best folks have jumped out to private practice. Processing is going to be slower, errors increase , refunds delayed etc.

You are dealing with them at a "professional" level. All my interactions start with a form telling me that they are denying something and that if I don't send them the taxes due within a few days they will start enforcement. It is more threatening than anything else. I then have to jump through hoops to give them whatever documentation is needed. It is clear to me that I am dealing with the lower end of the IRS food chain.

My favorite issue was that since I didn't claim the purchase price and selling price of my money market fund transactions on Schedule D I owed capital gains on 100% of my withdrawals from the money market fund. I explained how a money market fund worked but also offerred to amend my return with an updated Schedule D if necessary. I got away without amending my return.

As a tax professional, have you ever documented money market transactions on Schedule D? I can only see it necessary if the fund "broke the buck."

 

[GrayHare]

Another option is to form your own Charitable Remainder Trust. A CRT allows you to fine tune all aspects, such as term, payout rate, beneficiaries, and more. One downside is you need to file tax returns for the trust, another is few estate attorneys have extensive experience with such trusts.

 

[RE2Boys]

My favorite issue was that since I didn't claim the purchase price and selling price of my money market fund transactions on Schedule D I owed capital gains on 100% of my withdrawals from the money market fund. I explained how a money market fund worked but also offerred to amend my return with an updated Schedule D if necessary. I got away without amending my return.

As a tax professional, have you ever documented money market transactions on Schedule D? I can only see it necessary if the fund "broke the buck."

If the fund reported it on a 1099-B, then it is best to include it on your tax return, whatever it is. The fault in your case was your mutual fund company reported the money market transactions to the IRS. The IRS does a matching of 1099s to your return.

I do about 150 returns a year. If it is on a 1099, it is included on the tax return to avoid follow on questions.

 

[RE2Boys]

Besides the 50 and 30% limits on charitable deductions each year, in 2013 we return to a phase out of itemized deductions beyond a certain income level. In some cases, it may further reduce your charitable deduction.

More info in this article:

The Impact on the Charitable Deduction of the New Phaseout of Itemized Deductions | Planned Giving Design Center

 

[jebmke]

You are dealing with them at a "professional" level. All my interactions start with a form telling me that they are denying something and that if I don't send them the taxes due within a few days they will start enforcement. It is more threatening than anything else. I then have to jump through hoops to give them whatever documentation is needed. It is clear to me that I am dealing with the lower end of the IRS food chain.

My favorite issue was that since I didn't claim the purchase price and selling price of my money market fund transactions on Schedule D I owed capital gains on 100% of my withdrawals from the money market fund. I explained how a money market fund worked but also offerred to amend my return with an updated Schedule D if necessary. I got away without amending my return.

As a tax professional, have you ever documented money market transactions on Schedule D? I can only see it necessary if the fund "broke the buck."

As mentioned above, if it is on the 1099B it needs to be on Schedule D. I always reconcile the two as a quality check. It is a good way to catch omissions/errors on Schedule D inputs.

As for the letters, they normally provide 30 days to reply with documents. Normally they will also extend the time if you request an extension that is reasonable. I always respond to their letters in writing with POD even if I deal with them on the phone.

My personal 2009 return was open until mid-2012 due to a query and subsequently they lost my file. Many letters later they agreed to my return as filed and sent me my refund.

 

[kaneohe]

My favorite issue was that since I didn't claim the purchase price and selling price of my money market fund transactions on Schedule D I owed capital gains on 100% of my withdrawals from the money market fund. I explained how a money market fund worked but also offerred to amend my return with an updated Schedule D if necessary. I got away without amending my return.

As a tax professional, have you ever documented money market transactions on Schedule D? I can only see it necessary if the fund "broke the buck."

Never heard of such a thing........would you care to name that fund?

 

[jebmke]

Never heard of such a thing........would you care to name that fund?

I've seen it a couple of times on ML brokerage accounts -- usually branches that were independent that ML bought. At one point, they had a lot of weak reporting procedures.

Institutions are notoriously bad on 1099 reporting. IRAs especially. I always check these against the statements to make sure they are correct. They screw up the Box 7 codes a lot as well.

 

[2B]

Never heard of such a thing........would you care to name that fund?

It was well over a decade ago and probably in the 1990's. I'm not sure which discount brokerage I was using at the time -- Brown, TDAmeritrade or Etrade. I don't remember the transactions being on a 1099 but somehow the IRS found them. It was back in my individual stock days and I had an active year buying and selling so there were many ins and outs from the money market.

I had to pull out copies of my brokerage montly statements to show that the buying and selling price was a constant $1. I got the impression that the IRS agent I was dealing with didn't understand what a money market fund was. By the time I convinced her, I was starting to think I was in a SNL skit.

 

[braumeister]

We use Fidelity's Charitable Giving Account, and have no complaints.

+1
Minimum donation is just $50 and it has been very easy to use.

 

[panacea]

+1
Minimum donation is just $50 and it has been very easy to use.

+2 Not familiar with Vanguard's DAF, but quite familiar with Fidelity's. Easy to fund, easy to disburse and lots of good investments options within the Gift Account whether the plan is to disburse right away or hold a portion of the $ for a period of years.

 

[2B]

We use Fidelity's Charitable Giving Account, and have no complaints. This account was funded one year when we had unusually large earnings, for the purpose you describe. One thing you might want to do is to verify that the charities you want to support are approved for donations with the charitable fund you are considering. I was surprised to find that one charity we wanted to support was not approved. I believe it was organized under the 501 code, but not 501(c)iii. There are, however, plenty of other acceptable alternative charities to support, so it was not a major problem, although it was disappointing.

In looking over the Vanguard and Fidelity Charitable Trust websites I give Fidelity's site the edge. They both made it clear that they were not part of the investment firm.

It was easier for me to use Fidelity's site and they allow a $50 gift versus the $500 minimum at Vanguard. The Fidelity's site let's you open an account with $5,000 and Vanguard requires $25,000. It wasn't clear to me if Vanguard required that as a minimum account balance. Otherwise, the fees are the same. I didn't look at investment options. The principal charities I give to are all in their systems but I didn't expect that to be an issue.

 

[kaneohe]

In looking over the Vanguard and Fidelity Charitable Trust websites I give Fidelity's site the edge. They both made it clear that they were not part of the investment firm.

It was easier for me to use Fidelity's site and they allow a $50 gift versus the $500 minimum at Vanguard. The Fidelity's site let's you open an account with $5,000 and Vanguard requires $25,000. It wasn't clear to me if Vanguard required that as a minimum account balance. Otherwise, the fees are the same. I didn't look at investment options. The principal charities I give to are all in their systems but I didn't expect that to be an issue.

Thanks for summarizing (and for others' inputs as well). I know Nords has done similar things in the past but good to know how things stand currently.
If you evaluate other custodians , e.g. Schwab, your side-by-side comparison would be greatly appreciated.

 

[jebmke]

The principal charities I give to are all in their systems but I didn't expect that to be an issue.

They normally will process anything that qualifies as a charity, even if it is not in their system. It might take a little time for them to verify the charity. In the case of VG, they give you a field to enter in the EIN for the charity so they can match it up in the IRS records. I normally make sure I have the EIN from the organization to which we plan to make a grant so it gets processed without delay. I'm sure Fidelity has similar processes.

 

[FIREd]

I use Fidelity Charitable Trust and I have been very happy with it.

 

[Nords]

I find myself about to receive a windfall that will be taxed as ordinary income. This will push my tax rate up and most of the windfall will be taxed at the 28 or 33% rate.

Well, the first advice would be to consult a CPA about this-- even if it's for a free hour.

One question you could ask them would be a very dumb one: you're sure it's taxable, right? For example, if it's an inheritance bequest or a life insurance beneficiary payment then it would not be taxable.

Then you could ask them: even assuming that it really is taxable, do you have to take it? I'm not sure whether you can disclaim a windfall (like you could an inheritance) and pass it on to some lucky contingency "beneficiary". Another option might be to tell the payer to send it to your favorite charity instead of to you. That way the entire amount goes to your charity (as far as you can tell) instead of having to be processed through you and the U.S. Treasury. The CPA would be able to advise you on whether it's still considered phantom income.

[*]Does anyone see any problems with using Vanguard's Charitable Trust to write individual donations to charities? I have multiple charities that I donate to.

Don't know anything about Vanguard, but CGFs are fairly standard institutions these days. Even Vanguard with its rock-bottom bare-bones customer service should be able to handle it as well as they handle their other customer-service challenges.

[*]Does anyone have another charitable trust platform they would recommend?

I'm with Fidelity by default (four generations of Ohana Nords funds there) and it's great. Lots of features, lots of choices. You can also confirm that your charities are part of their database, or could be added. The best part of a charitable gift fund is that you can make the grants anonymously. You'll never get another donation letter in your mailbox-- unless you want one.

[*]Does anyone see any problems taking a large charitable deduction in one year to do this?

Another question for your CPA. Although they're limited by your income (as previously noted), you may be able to roll the unused deduction forward like a capital loss. I don't know because I've never made that large a charitable deduction.

Another option would be to boost your taxable income by harvesting capital gains (from your other investments or an IRA conversion) and then making the large charitable deduction up to the 50%/30% limit.

I don't think the IRS cares as long as the 1099s and the other computer-generated paperwork matches up. Of course boosting your income may also trigger other taxes like AMT, so you'd want to seek professional help on your tax return.

[*]Could I donate appreciated after-tax assets to this trust effectively eliminating future LT capital gains but taking the charitable donation on the appreciated amount?

I can't speak for Vanguard, but Fidelity's charitable gift fund works straight from the tax code. You can donate appreciated shares of stock or other valuables like real estate or art (for which an appraisal might be required). I was not able to have royalty checks donated directly to the CGF, but the staff said that's because the tax code didn't permit it. If the tax code changes then the CGF will probably change their policy to suit.

Another huge advantage of a CGF is that it decouples your donations and your grants. You're able to make a gargantuan donation this year (because you want to) but you can continue to parcel out your grants to your charities over whatever annual schedule you prefer. The CGF only cares that you meet the IRS requirement of disbursing a long-term average of at least 5% of the amount in the CGF each year, just like any other charity. I think the Fidelity CGF actually tracks the long-term average for you over a three-year or five-year period and tells you when you fall short.

[*]Would anyone like to suggest another way to reduce the taxable income besides a charitable trust?

Getting back to that CPA... they may be able to show you a way to set up a charitable remainder trust so that you don't pay taxes on the windfall but only pay taxes on the income that you receive from it. But this is way beyond my knowledge of the tax rules.

 

[MooreBonds]

Another huge advantage of a CGF is that it decouples your donations and your grants. You're able to make a gargantuan donation this year (because you want to) but you can continue to parcel out your grants to your charities over whatever annual schedule you prefer. The CGF only cares that you meet the IRS requirement of disbursing a long-term average of at least 5% of the amount in the CGF each year, just like any other charity. I think the Fidelity CGF actually tracks the long-term average for you over a three-year or five-year period and tells you when you fall short.

When I opened my account with Vanguard Charitable a few years ago when I had a blip up in income/tax brackets, I asked the Vanguard Charitable people about this 'requirement'. I was told that the only mandate is that the overall Vanguard Charitable organization as a whole has to meet the 5% minimum....and this makes sense, because you don't technically/legally 'own' the funds anymore, the entire Charitable fund does as a whole.

Because VC, as a whole, distributes some huge % of assets each year (like 20%+), they easily meet this IRS requirement. The only stipulation VC makes on each account holder is that they make at least 1 'grant recommendation' every 7 years ($500 minimum).

I haven't compared them lately, but VC has increased the number of investment offerings available, as well as slightly decreased the annual expenses. The web interface may not be as intuitive or as great as some other sites, but I only need to move around it maybe once or twice a year (I log in more often to see the balances, but only need to really use the site less frequently). The rock bottom vanguard fund options make up for the slight hassle of the website. And since I don't give to 100 different charities, the minimum donation isn't as much of an issue for me.