Wealth Planning Commentary – December 2, 2024

Warren Buffett’s Charitable Lessons

Warren Buffett recently made a significant donation of $1.15 billion in Berkshire Hathaway stock to charity. It’s an act that, while extraordinary, represents less than 1% of his $149 billion net worth. Most of Buffett’s wealth is tied up in Berkshire Hathaway stock, and he has consistently donated approximately 4% of his Berkshire Hathaway shares every year for the past several years.

What stands out about Buffett’s approach to philanthropy is his transparency, particularly when it comes to estate planning. He has shared that after his passing, the bulk of his wealth will be managed by a charitable entity overseen by his three children. This arrangement may help his children work together for a cause. There are also estate planning benefits like tax mitigation and future income for his next of kin.

While the magnitude of such a plan is out of reach for most, there are still valuable lessons to be learned from Buffett’s charitable strategy. The key takeaway is that charitable giving can be proactively incorporated into a long-term plan. But many of us wait until the end of the year and rush into donations.

There is a common misconception that charitable donations are primarily an income tax strategy. While there can be tax benefits, they should always be seen as secondary to the primary goal of supporting meaningful causes. When considering a donation, understand that the cost of a gift is the after-tax value of the gift minus the tax deduction (typically calculated by applying your ordinary income tax rate to the value of the donation). There may be situations, such as with split-interest vehicles, where the financial outcome could be more favorable, but the administrative burden and associated costs sometimes outweigh the benefits.

Ultimately, the primary benefit of giving lies in the impact it has on the causes that matter most to you and your family.

For those planning charitable donations, there are several key considerations. First, there are limits to how much one can deduct each year. These limits depend on the donor’s adjusted gross income (AGI), the type of asset being donated, and the nature of the charity. For instance, cash gifts to public charities can generally be deducted up to 60% of AGI, while appreciated public securities are limited to 30% of AGI.

It is also important to remember that nearly any asset can be donated, including original artwork. However, many tangible property donations are deductible at the lesser of market value or cost basis. Donations that exceed the AGI limits can be carried forward for up to five years, but any unused portion will be lost if not applied within that period.

Many families now use Donor-Advised Funds (DAFs) as part of their charitable planning. DAFs are considered public charities for tax purposes, which allows donors to take advantage of the most favorable deduction rules. DAFs such as those offered by Fidelity Charitable and Schwab Charitable even accept donations of non-traditional assets, including private business interests, cryptocurrency, pre-IPO stock, private equity, hedge fund interests, life insurance, and real estate. These types of donations can provide additional flexibility, but it is essential to ensure that contributions are made by year-end to count for the current tax year.

On the estate tax side, many individuals are now incorporating charitable bequests into their wills and revocable trusts to offset state and federal estate taxes. Setting this up typically requires an amendment to an existing trust, which can be facilitated by an estate attorney.

Finally, one last piece of advice from Warren Buffett: he encourages discussing your estate plan with your heirs while you are still alive. This helps ensure that they are less surprised if their inheritance is reduced by charitable bequests.

Please reach out to your Wealth Manager with questions about charitable giving.