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The Lynch Method: How to Give Away Money and Save on Taxes

By sagebytes —

Peter Lynch's Smart Giving Strategies

Maximizing Charitable Impact While Minimizing Taxes

Peter Lynch, the legendary investor who managed Fidelity's Magellan Fund (the best-performing mutual fund over a 15-year period), shares valuable insights on incorporating charitable giving into investment strategy.

Core Philosophy

"Most of us spend more time building up our net worth than we do in figuring out how to give it away for maximum benefit." Lynch emphasizes that a thoughtful giveaway plan should be part of any investment strategy to ensure your assets benefit your chosen recipients rather than being claimed by estate taxes.

Strategic Giving Approaches

1. Lifetime Giving vs. Estate Giving

  • Give during your lifetime rather than waiting until death
  • Avoid the 55% federal estate tax that applies to inheritances
  • Take advantage of the $600,000 one-time tax-free gift ($1.2 million per married couple)
  • Utilize the annual $20,000 tax-free gift allowance to children

2. Stock Donation Strategy

  • Donate appreciated securities directly to qualified charities instead of cash
  • Benefit: Avoid the 28% capital gains tax while still receiving the full tax deduction
  • Example: Donating $5,000 in appreciated stock that originally cost $2,000 saves $840 in capital gains tax plus provides $1,550 in income tax deductions (for those in highest bracket)

3. Charitable Fund Investing

  • Consider investment vehicles like Fidelity's Charitable Gift Fund
  • Contributions are tax-deductible immediately
  • Assets grow tax-free within the fund
  • Distribute to charities of your choice when ready ($250 minimum)
  • Advantage: $10,000 invested at 10% annually grows to $67,000 tax-free over 20 years vs. only $43,000 after taxes in a regular investment

4. Challenge Grants

  • Offer donations contingent on the charity raising matching funds
  • Leverages your contribution to generate additional support
  • Can lead to deeper involvement with organizations you support

Advanced Charitable Vehicles

For Substantial Assets:

  • Charitable Remainder Trust: Donate assets, receive income for life, charity gets remainder
  • Pooled Income Fund: Join with other donors, receive income, charity inherits
  • Charitable Lead Trust: Charity receives income, heirs get assets upon death
  • Life Estate Agreement: Donate home while retaining right to live there
  • Charitable Trust with Insurance: Trust benefits charity while insurance replaces value for heirs
  • Gift Annuity: Make donation, receive fixed payments for life

Bottom Line

"What's the use of struggling to accumulate net worth, and then allowing it to be carted off to Washington by strangers?" Smart charitable giving allows you to support causes you value while minimizing tax burden and potentially increasing your overall impact.