We understand that financial planning isn't just about growing your wealth. It's also about aligning your resources with your values, creating a legacy that positively impacts others. This legacy can be to individuals (i.e. family and friends) but often includes charitable giving. This article is part of a multi-article post exploring charitable giving. In our first post (Charitable Giving – Starting the Conversation), we discussed the deeply personal reasons for giving and how to start that conversation.
In this article we’re going to move beyond the WHY to the HOW. Understanding the various ways to give to charity can lead to more tax-efficient giving, ultimately resulting in a positive impact for both the donor and recipient. The best strategy will depend on your individual financial situation, philanthropic goals, and tax considerations. Today, we’re going to focus on several of the most common charitable giving methods, outlining their advantages and disadvantages to help you make informed decisions.
1. Cash Donations:
The simplest form of charitable giving is donating cash. You can write a check, make an online donation, or contribute through payroll deductions. Cash donations are generally tax-deductible, allowing you to reduce your taxable income.
- Advantages: Simple, direct, and readily available.
- Disadvantages: May not be the most tax-efficient method for larger donations.
2. Donating Appreciated Assets:
Instead of cash, consider donating appreciated assets like stocks, bonds, or real estate that you've held for more than one year. This strategy offers significant tax advantages. You can generally deduct the fair market value of the asset at the time of the donation, and you avoid paying capital gains taxes on the appreciation. This can be particularly beneficial if the asset has significantly increased in value.
- Advantages: Tax-efficient, avoids capital gains taxes, can provide a larger deduction than cash donations.
- Disadvantages: Requires careful planning and coordination, may not be suitable for all assets.
3. Donor-Advised Funds (DAFs):
A donor-advised fund is a charitable giving account that allows you to make a contribution, receive an immediate tax deduction, and then recommend grants to your chosen charities over time. You can contribute various assets to a DAF, including cash, stocks, and real estate. Once received by the DAF, the funds are invested and grow tax-free, allowing your charitable giving to potentially have a greater impact.
- Advantages: Flexible, allows for strategic grantmaking, provides immediate tax deduction, potential for tax-free growth.
- Disadvantages: You relinquish control over the donated assets (the DAF sponsor owns the assets), grants are recommendations, not obligations.
4. Charitable Trusts:
Charitable trusts are legal arrangements that allow you to donate assets to a trust, which then distributes income to a designated beneficiary (either a charity or a non-charitable beneficiary) for a specified period. There are various types of charitable trusts, each with its own specific rules and tax implications. Two common types are:
- Charitable Remainder Trust (CRT): A CRT provides income to a non-charitable beneficiary for a set term or life, after which the remaining assets go to a designated charity.
- Charitable Lead Trust (CLT): A CLT pays income to a charity for a specified period, with the remaining assets reverting to a non-charitable beneficiary.
- Advantages: Can provide income stream, potential for significant tax benefits, allows for customized giving strategies.
- Disadvantages: Complex legal arrangements, requires careful planning and professional guidance, may not be suitable for everyone.
5. Qualified Charitable Distributions (QCDs):
If you're over 70 ½ years old and have a traditional IRA, you can make a QCD directly to a qualified charity. QCDs are not included in your taxable income, even if you take the standard deduction. The ability to not include the amount in your income while still taking the standard deduction provides a wonderful way to gift when over age 70 ½. This can be a tax-efficient way to fulfill your required minimum distributions (RMDs) while supporting your favorite charities.
- Advantages: Tax-efficient way to give from an IRA, can satisfy RMDs, not included in taxable income.
- Disadvantages: Limited to $100,000 per person per year, must be made directly to a qualified charity.
6. Bequests:
You can also make charitable gifts through your estate plan by including bequests in your will or trust. This allows you to create a lasting legacy with the causes you care about. Bequests are generally exempt from estate taxes. When considering which assets to bequest to charity, it’s recommended to gift pre-tax assets as the receiving charity will not owe taxes. On the flip side, Roth and other assets that receive a step-up in basis at death are better to gift to non-charity recipients.
- Advantages: Allows for planned giving after your lifetime, can create a lasting impact.
- Disadvantages: Does not provide immediate tax benefits, requires careful estate planning.
7. Creating a Private Foundation:
For those with substantial resources and a desire for greater control over their charitable giving, establishing a private foundation might be an option. Private foundations allow you to create a separate legal entity dedicated to charitable purposes. However, they also involve significant administrative responsibilities and compliance requirements. Due to ongoing costs and compliance oversight, paired with much easier options noted above, Private Foundations typically only made sense for the ultra-wealthy.
- Advantages: Greater control over grantmaking, can involve family members in philanthropic activities.
- Disadvantages: Complex to set up and administer, requires ongoing management and compliance, less tax-efficient than some other options.
Choosing the Right Strategy:
The most effective charitable giving strategy is the one that aligns with your individual circumstances, philanthropic goals, and financial objectives. Consider the following factors when making your decision:
- Your financial situation: How much can you afford to give?
- Your philanthropic goals: What causes are you passionate about?
- Your tax situation: What are the potential tax benefits of different giving methods?
- Your desired level of involvement: How much control do you want to have over the grantmaking process?
Working Together:
We recognize the complexity and importance of creating your legacy, and we’re here to help you navigate the world of charitable giving. We can discuss your philanthropic goals, analyze your financial situation, and develop a giving strategy that maximizes your impact while minimizing your tax burden. Don't hesitate to reach to discuss how you can integrate charitable giving into your overall financial plan. Together, we can make a difference.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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