Charitable Giving Strategies
Charitable giving is a highly personal decision and people have a variety of reasons for why or how they choose to give. Some choose to support personal values or beliefs, such as donating to a religious organization, an Alma mater, or in a way that leaves a legacy; others may give for the purposes of tax and estate planning opportunities. Furthermore, there are many ways to give strategically and each method can have different tax benefits based on factors including the type of gift, the manner in which the donee receives it, how the donor gives it, and the type of organization that it is given to.
With all of the strategies and considerations involved in charitable giving, we offer a brief summary of five different strategies you may consider and we encourage you to discuss with us how we can incorporate your charitable giving desires into your financial plan.
1) Direct Gift
You can make an outright gift during your lifetime or leave it through your will as a bequest. Donations to charity often include various types of assets, such as cash and securities, as direct gifts. For example, a cash gift to a political campaign is a popular direct gift. Further, a direct gift may entitle you to a charitable income tax deduction, depending on your income level. If eligible, deductions are generally allowed for up to 50% of adjusted gross income (AGI), assuming the gift is cash and made to a public charity. Gifts of long-term appreciated property offer potential deductions of up to 30% of AGI. Additionally, any part of the deduction that cannot be used in the year the gift is made can be carried forward for up to five years. Another benefit of a direct gift is that it may lower your estate taxes by removing the asset and its appreciation from your estate. For gifts made at death, there could be an estate tax deduction equal to the amount of the gift.
2) Donor Advised Fund
Another method of gifting is through a Donor Advised Fund, or DAF. A DAF provides a flexible way to give donations to nonprofit organizations. You make an irrevocable, nonrefundable contribution of cash or securities to the fund. You can then direct the fund’s administrator as to which qualified organizations grants should be made, the amount of the grants and when grants should be paid. There are many benefits to investing through a DAF, including:
- Low cost to maintain – donate to the fund as often as you like and receive an immediate tax benefit.
- Able to invest contributions – a DAF allows for liquid contributions only (stocks, bonds, etc.).
- Full control over the fund – your DAF acts like a charitable savings account—put money in today and grant it to charities when you’re ready.
3) Charitable Trusts
A great way to accomplish your philanthropy goals are through the use of charitable trusts. A charitable trust is not tax exempt, and is usually devoted to one or more charitable purposes. Although it is not tax exempt, a charitable trust is allowed a charitable contribution deduction. There are a few types of charitable trusts that allow you to give to charity in an array of ways.
- Charity Remainder Annuity Trust
- A charitable remainder annuity trust (CRAT) is used in situations where the donor wishes to provide a non-charitable beneficiary with a stream of income to last for a specific time period. However, if a term of years is used, it cannot last more than 20 years. Furthermore, the income stream must represent at least 5% of trust principal.
- Charity Remainder Unit Trust
- The charitable remainder unit trust (CRUT) is similar to a CRAT with the difference that in the CRUT the donor can make additions to the trust. Another difference is that once the trust is established, the trust must pay out a specific amount of income each year, as a fixed percentage of at least 5%.
- Charitable Lead Trusts
- The purpose of a charitable lead trust (CLT) is to reduce the donor’s current taxable income. This is an irrevocable trust that works like a Charitable Remainder Trust in reverse; first, the income goes to the designated nonprofit organization and second, the remaining assets go to the trust beneficiaries. Although there is no income tax deduction when you create a charitable lead trust, your gift or estate tax is greatly discounted and any growth is passed to your heirs gift and estate tax free. It is one of the only transfer devices currently used that can discount the value of the original assets and result in little or no taxes. At the same time, you fulfill your charitable desires.
4) Private Foundations
A private foundation is a nonprofit organization which is usually created via a single primary donation from an individual or a business and whose funds and programs are managed by its own trustees or directors. Although contributions to private foundations technically are tax deductible, many of these nonprofits do not accept donations. Instead, private foundations usually invest their principal funding, then distribute the income from investments for charitable purposes.
5) Pooled Income Fund
A pooled-income fund allows you to “pool” together cash or securities to create one large gift for charity. The charity then reinvests these assets as a pool, similar to traditional mutual funds. The fund’s annual income is paid to you or your beneficiaries, based on your share and/or each beneficiary’s share of the pool. Upon the death of the fund’s beneficiary or beneficiaries, the remaining share of the pool is transferred to the charity. A donor to a pooled-income fund is generally entitled to a charitable income tax deduction for the amount the charity is expected to receive at the donor’s death.
As you can see, there many charitable giving vehicles each having their own benefits and uses to achieve both philanthropic and financial planning goals. There are a couple of key points to keep in mind when considering any of these options. First, it can be more beneficial to make a gift during your lifetime rather than at death because there are both income and estate tax benefits. Second, there are various advantages depending on the types of assets that are used when donating to charity. Third, gifts made to a private foundation or donor-advised fund allow for an immediate income tax deduction and give you added flexibility when determining the time of the grants. Finally, as previously stated, we would love to talk with you further if charitable giving isn’t already accounted for in your comprehensive financial plan and you would like it to be.