MAKING A DIFFERENCE

Strategies to Consider in Charitable Giving

Key Takeaways:

  • The strategies you choose to maximize your philanthropic efforts will depend on your specific financial situation and charitable goals; no single strategy is right for everyone.
  • Some of the most common strategies include simple checkbook philanthropy, will bequests, contributions to community foundations and donor-advised funds, charitable gift annuities, and charitable trusts.
  • The more complex your financial situation, the more complex the appropriate charitable vehicle may be. As appropriate, consider working with a financial advisor who in turn works with specialists in charitable giving.

Your philanthropic goals and financial situation are unique to you. This means that no single way of giving is optimal for everyone. The following descriptions of ten giving tactics will give you a good overview of the key options available. Keep in mind, however, that the complexity of your charitable giving is likely to increase along with your wealth and the complexity of your overall financial life.

1. Checkbook philanthropy

These are gifts made in response to requests or one-time situations such as fundraising events. Such giving usually occurs with little advance planning by the donor and typically is not part of a strategic approach. As a result, it may not convey the maximum benefit to either the donor or the charitable organization.

2. Volunteering

This could involve volunteering to assist with an organization’s program activities, serving on the board, helping with fundraising, providing pro bono professional services or otherwise becoming involved in its mission. In addition to being personally rewarding, volunteering gives you an insider’s look at the needs and effectiveness of an organization.

3. Will bequest

This is a simple and easy type of planned charitable giving that allows you to benefit your charitable causes while enabling you to retain use and ownership of your assets while you are still alive. You can leave cash or property to a charity by including a bequest in your will or trust. For property that passes via a beneficiary designation (such as individual retirement accounts), you can designate the charity as beneficiary. The amount you give will not be subject to estate tax.

4. Community foundations

Community foundations are nonprofit organizations that pool the support of many donors to benefit a specified community. They are governed by boards of private citizens charged with speaking for the needs and well-being of the communities served. They generally offer a number of options for charitable giving, including donor-advised funds and donations to the foundation’s unrestricted funds. The foundation invests and administers these funds, simplifying your charitable giving.

5. Donor-advised funds

Donor-advised funds are charitable-giving accounts offered by sponsoring organizations, typically community foundations and financial services companies. They allow you to make contributions and receive immediate tax deductions, at the same time making recommendations for distributing the funds to charitable organizations of your choice on your own timetable. By aggregating donors and donations, donor-advised funds are able to keep administrative costs relatively low, and thus they offer an attractive alternative to private foundations.

6. Private foundations

Private foundations—often family foundations—are tax-exempt, nonprofit entities that make grants to charitable organizations. Typically established through a significant initial gift, they allow the founder full control over management of the funds and granting to charities. Foundations are overseen by boards, often comprising family members, friends and financial advisors, that make all major decisions about the direction of the foundation. In contrast to donor-advised funds, private foundations can have significant startup and legal costs as well as higher ongoing management costs.

7. Life insurance

Life insurance can be used to make charitable gifts in a number of ways, each one accomplishing slightly different goals and carrying different tax implications. These are several of the more-common methods:

  • The charity is named as beneficiary of the policy. The policy’s proceeds will be passed free of gift and estate taxes.
  • The policy owner gives an existing policy to a charitable organization. The donor may take an income tax deduction for the fair market value of the policy and deduct future premiums.
  • Policy dividends are given to the charity. The value of the dividends is tax-deductible.
8. Charitable gift annuities

A charitable gift annuity is a contract between a charitable organization and a donor whereby the donor makes a gift to the charity in return for guaranteed fixed payments for the lifetime(s) of an individual or two. The annuity payments are based on a set schedule: the older the person (or persons) receiving the annuity, the higher the rate.

Most types of assets can typically be donated, including cash, securities, real estate, art and collectibles. Depending on the life expectancy of the donor and the anticipated income stream, there may be a partial tax deduction for the gift itself. A portion of each gift annuity is tax-free, with the remainder taxed at regular income tax rates. After the death of the last beneficiary, the remaining value of the annuity contract is distributed to the charity.

9. Charitable remainder trusts

A charitable remainder trust (CRT) is an irrevocable trust that receives cash or property from a donor, generates a potential income stream for the donor or his or her beneficiaries for life or a term of years, and then distributes the remainder to one or more charities selected by the donor.

A key advantage of CRTs is that they are tax-exempt. This means that the donor can contribute highly appreciated assets that the CRT can then sell without paying capital gains tax. The trustee may then reinvest the proceeds into a more diversified or higher-yielding portfolio. In addition, the donor may receive a partial income tax deduction based on the value of the eventual gift to charity.

There are two types of CRTs:

  • A charitable remainder annuity trust pays a fixed dollar amount each year.
  • A charitable remainder unitrust pays an amount equal to a percentage of the trust value at the beginning of each year.
10. Charitable lead trusts

A charitable lead trust (CLT) is the mirror image of a charitable remainder trust. It receives cash or property from a donor and generates an income stream from which it makes payments to a charity for a specified period. At the end of that period, it distributes the trust property to a specified beneficiary, usually family. Unlike CRTs, CLTs are taxable trusts, with income in excess of charitable deductions subject to tax.

Giving to charitable causes need not be overly complicated when you choose one or more of the straightforward giving vehicles. However, if you want to give substantial amounts and make the biggest possible impact on both the charity and your own financial situation, use of one or more of the more-complex vehicles may be appropriate. In this case, working with a professional financial advisor who in turn works with specialists in charitable giving can be extremely helpful in ensuring that your charitable dollars create the maximum impact you are looking to achieve.