Americans have long been recognized for their generosity and commitment to philanthropy. In 2023, the United States witnessed a remarkable event in the philanthropic world-charitable donations reached a record-breaking $557.16 billion, according to the Giving USA 2024 report. This inspiring level of giving, despite rising inflation, demonstrates the enduring priority many place on supporting charitable causes.
For those considering a significant charitable contribution, thoughtful planning is essential. One strategy that can maximize the impact of a large gift is establishing a charitable trust, particularly when dealing with complex financial situations such as concentrated stock holdings.
Understanding Concentrated Holdings
A concentrated holding occurs when a single asset represents a substantial portion of an individual’s investment portfolio, often defined as more than 10% of the total portfolio value. While such holdings may have generated significant wealth over time, they also introduce considerable risk. A decline in the value of this single asset could have a disproportionately negative impact on the overall portfolio.
Managing the risks associated with concentrated holdings requires careful consideration. Simply selling the asset might not be advantageous due to potential capital gains taxes. However, alternative strategies can help diversify the portfolio while still achieving philanthropic goals.
Strategies for Managing Concentrated Holdings
Several options are available for those looking to address the risks of concentrated holdings:
- Selling the holding: This straightforward approach involves accepting the tax consequences and reinvesting the proceeds into a diversified portfolio. However, the tax implications can be significant.
- Hedging the position: This strategy might include purchasing protective options or employing more complex financial instruments. While hedging can mitigate some risks, it also involves additional costs and complexities.
- Establishing a Charitable Remainder Trust (CRT): For those who desire to give back to their community, a CRT offers a tax-efficient alternative that supports charitable giving.
How a Charitable Remainder Trust Can Benefit You
A Charitable Remainder Trust (CRT) is a strategic financial tool designed for individuals who wish to support charitable causes while managing their wealth. By transferring assets into a CRT, the donor can receive an income stream for life or a specific period, with the remaining assets eventually passing to a designated charity.
This approach offers several key benefits:
- Tax efficiency: By transferring appreciated assets to the CRT, donors can avoid capital gains taxes that would be incurred if the assets were sold outright.
- Income tax deduction: Donors may also be eligible for a charitable income tax deduction based on the value of the assets placed in the trust, the trust’s duration, and prevailing interest rates.
Comparing Strategies for Charitable Giving
When deciding between a direct sale of assets and establishing a Charitable Remainder Trust, consider the following:
- Direct Sale and Donation: Selling appreciated assets and then donating the proceeds can result in a significant tax liability, reducing the overall amount available for both reinvestment and donation. While this approach offers flexibility and control over the assets, more tax-efficient strategies may exist.
- Charitable Remainder Trust: Transferring assets to a CRT can avoid immediate capital gains taxes, providing a larger initial fund for reinvestment. The trust can generate a steady income stream for the donor while benefiting the chosen charity. This strategy can significantly enhance the donor’s financial position and charitable impact.
Planning for Your Financial Future
Deciding to use a Charitable Remainder Trust is a significant decision that should be based on your unique financial situation and philanthropic goals. This approach can be particularly effective for individuals with concentrated holdings who are also committed to supporting charitable causes. It offers a sense of financial security, as you can rely on the remaining portfolio for your future needs.
At Legacy Private Trust Company, we understand that each client’s financial circumstances and charitable objectives are unique. Our experienced trust officers are here to provide personalized guidance, help you navigate the complexities of planned giving, and ensure that your charitable contributions are both impactful and tax-efficient.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
