Jim’s August Tip: What Kind of Philanthropist Do You Want to Be?

October 08, 2021

A Giving Strategies post by Jim Friedman

Whether you plan to or not, you are likely to be a philanthropist some day. The key question is: “Are you are going to have a say in who receives your philanthropy?”

The fact is you do have a very real choice whether you want to be a voluntary philanthropist or an involuntary philanthropist.

Involuntary philanthropy is what happens when the federal, state and local governments decide what to do with the money that your estate or retirement account, like an IRA, pays in taxes. If you make provisions now to direct who you want to be the recipients of your estate and or your qualified retirement assets, in addition to your heirs, you can actually eliminate involuntary philanthropy all together. Moreover, you can make sure that your charitable gifts are consistent with your priorities.

Most people find far greater pleasure in being voluntary philanthropists than involuntary philanthropists. They have worked hard to accumulate their assets and don’t like the prospect of a large amount of their life savings disappearing into a government budget.

One of the enjoyable parts in my work with people in the process of figuring out whether and how to give to charity is that they end up feeling much better about their eventual transfer of assets. By matching their lifetime values with those organizations that will continue to support those values, people feel more sense of purpose about what happens to their estate.

It is actually quite easy to make sure that you are going to be a voluntary philanthropist:

First make sure that you and your spouse have a will. Properly prepared with charities designated to receive the portion of your estate that exceeds what you are allowed to give your heirs tax free, you can avoid having any unintended philanthropy ending up in the government’s treasury. In fact the federal government encourages this through numerous charitable gift-planning incentives. A planned giving professional can assist you by first understanding your philanthropic and financial priorities and then explaining a variety of charitable giving concepts that make sense for you and your family.

Many people are unaware that they own what I call “good” assets as well as “bad” assets. “Good” assets are stocks, bonds, and real estate that at death will be stepped up in basis. This means that your heirs will inherit them with a cost based on the date of death—not when they were purchased. When your heirs sell these assets, there is likely to be little or no taxes paid.

So what are “bad” assets? Whatever is left in your retirement account—IRA—will be fully taxed at ordinary income rates. This means your heirs could pay as much as 40 percent or more in taxes on what they inherit from your IRA. However, if the IRA assets are left to a charity such as the Jewish Federation of Cincinnati, no taxes are paid and 100 percent of your assets will have an impact on the causes you care about.

Recently I mentioned this distinction between “good” assets and “bad” assets to a Montgomery couple I was having lunch with, who immediately realized that this was a smart way for them to establish a substantial legacy gift without taking away from what they want to leave to their children. The wife, Sarah [name changed for privacy] told me, “This is like magic. I never imagined that I could be so charitable without really taking anything away from my children.”

The old adage that “charity begins at home” takes on new meaning when you commit to being a voluntary philanthropist. By putting in place mechanisms that control how your money ultimately is utilized, you can achieve a real satisfaction that is often missing. No matter how old you are, or how much wealth you have accumulated, you owe it to yourself to make sure your philanthropy will be your choice.

You can reach Jim Friedman, Director, Planned Giving and Endowments, at 513-985-1524 or jfriedman@jfedcin.org. You can reach the Federation’s Create Your Jewish Legacy team here and the Create Your Jewish Legacy website here.

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