How to Donate $1M to Charity (Tax-Efficient Strategy Explained): Case Study

When a client comes to us with big goals, like leaving $1 million to their favorite charity, the question is usually not can they do it, but how can they do it? Well, today we’re going to be talking about a situation where a client did just that. Let’s chat. 

My name is Gina DiGirolamo. I’m here today with Cody Vanderhagen. Cody, thanks for joining me. 

Happy to be here. 

We’re going to be talking about a client case study, someone that you’ve recently worked with. And we’re going to be sharing how they gave a meaningful gift to charity. So if you could start and just tee up the client situation. 

Yeah. So we’re working with a married couple, both recently retired. The husband’s age 66 and the wife’s age 60, and they have about $7 million in assets, five of which are in IRAs, 1.5 in taxable accounts, and then about 500,000 in Roth IRAs. And they currently take $20,000 a month from their taxable account for their living expenses. 

And what was their big goal? 

So they wanted to give a $1 million donation to their local church. 

And why not just have them write a check? 

So they could write a check, but they’d be leaving a lot of tax efficiency on the table. 

So what did you recommend instead? 

Yeah. So we structured the donation, the charitable gift, as 60% highly appreciated stock and 40% cash, which we raised from selling taxable assets. 

So let’s talk about the highly appreciated stock. Why would that be a recommendation for a charitable gift? 

So when you give highly appreciated stock, you don’t have to pay capital gains tax. So you can essentially avoid a large capital gains bill at the end of the year. And secondly, you get the full fair market value deduction on any of those assets. 

So let’s talk more about the highly appreciated stock. Why would you recommend that when it comes to charitable gifts? 

So two main reasons. The first one is to avoid capital gains tax. When you gift highly appreciated stock, you don’t have to worry about paying capital gains tax. Depending on tax brackets, this could potentially save 15 to 20%, which in this case could result in roughly $90,000 to $120,000 in tax savings. 

The second reason is you get the full fair market value deduction on any of those assets that you give. 

So let’s talk about the deductions. How does that work when it comes to stock versus cash deductions? 

This can be a little bit complicated, but think of it this way: highly appreciated stock can generally be deducted up to 30% of adjusted gross income, while cash donations can be deducted up to 60% of adjusted gross income. 

For example, if someone has $100,000 of adjusted gross income, they could deduct up to $60,000 if giving cash, or up to $30,000 if giving appreciated stock. 

It’s also important to note that any unused deductions can be carried forward for up to five years. 

We’ve talked a lot in the past about donor-advised funds. Why not recommend one in this situation? 

Donor-advised funds are useful when they align with your goals. In this case, the clients knew exactly where they wanted the donation to go, and they wanted to spread the deduction over multiple years. A donor-advised fund would have provided the deduction upfront, which didn’t fit their plan. 

You mentioned these folks are retired and taking distributions from a non-qualified account. How did this charitable gift impact their income planning? 

This is where planning becomes important. To utilize the deduction, they needed to recognize ordinary income. So we recommended switching their monthly distributions from the taxable account to their IRA. 

This allowed them to generate income that could then be offset by the charitable deduction. 

Is there still an opportunity for Roth conversions in this scenario? 

Yes. After offsetting income with deductions, they can still potentially convert funds into a Roth account within a targeted tax bracket. This may help reduce future required minimum distributions, manage lifetime taxes, and adjust the balance sheet for beneficiaries. 

We also need to consider Medicare premiums when increasing income. 

That’s a tradeoff with Roth conversions. However, the long-term benefits may outweigh the short-term increase in premiums. 

We covered a lot today. What are the key takeaways? 

When making a charitable gift, it’s not just about generosity—it’s about strategy. You want to consider what assets you’re giving, how to maximize tax efficiency, and how it fits into your broader financial plan. 

It’s important to work with an advisor to build a comprehensive plan that includes both charitable giving and income planning. 

If you’re charitably inclined and want to see how a strategy like this might fit into your plan, reach out to our team at Blue Chip Partners. We’d be happy to help. 

Thanks so much for joining me. 

My pleasure. 

And thanks for watching. Can’t wait to chat again soon.