By Brady Marlow, CFP®, AEP®, CAP, CPWA®, CExP™, Director, Carson Private Client Wealth Strategy
The emotional and psychological benefits of charitable giving are well documented. It can feel very rewarding to make a difference in the world, and there are many worthy organizations that depend heavily on private funding. But there are also financial benefits that can go along with charitable giving. With careful planning, you may be able to reduce your tax bill or optimize the impact of your estate.
Whether you already have causes near and dear to your heart that you’re ready to support or you’re still looking for rewarding ways to give back, advanced planning can help increase the benefits for both you and your chosen charities.
First Steps in Charitable Giving Planning
A few simple first steps can give your charitable giving plan a solid foundation.
Establish a Budget and Schedule for Giving
One of your first tasks is to determine how much you are comfortable giving. This is, of course, a very individual decision. You’ll want to consider your income, net worth, types and liquidity of assets, your future needs and family’s needs, and any other plans you want to fund like a business venture or advanced degree.
Also think about the best timetable for your giving. Do you want to donate once or on a regular basis? Are you interested in giving during your lifetime or through your estate? The timing of your giving can be as important as the amount.
Create Goals for Your Support
At the same time, consider what you want to accomplish. Your goals can affect the amount and timing of your giving and vice versa.
If you haven’t chosen a charity yet, think about who you are and what kind of impact you want to make on the world. You may be influenced by beliefs, personal experiences, or challenges you see not being met. For example, if you have a family history of cancer, you might decide to donate to medical research. If you believe in the importance of secondary education, providing scholarships for first-generation college goers may be a good avenue for your support. Take stock of your passions and use that to guide your decision.
Once you have a charity in mind, drill down on the goals of your support. What do you want to do for that organization? Fund a specific event or project? Enable them to hire more staff? Create a stream of income? Or maybe boost their publicity budget to attract more donors? Most groups will accept general donations, but having a specific goal in mind can help clarify your own planning.
Determine the Assets You Want to Donate
While cash is the simplest asset to donate, you can also donate non-cash assets such as stocks, real estate or private business interests. Donating assets that have appreciated in value can unlock additional funds for charity and even reduce your tax liability if IRS requirements are met.
Structuring Your Charitable Giving
It’s important to choose a donation structure that fits your resources and goals. Whether the structure you decide on is simple or complex, be sure to discuss the tax implications with your tax or financial advisor. They can help ensure that your giving is set up correctly to provide the benefits you want.
The simplest options are one-time and annual recurring donations. If you’ve received a financial windfall, have a specific asset to donate, or want to support a specific event or project, you can make a one-time donation. You could give the rare artwork your grandmother left you to a museum, donate your year-end bonus to the food bank for Christmas meals, or help with the costs of a fundraising event to save local wetlands, for example.
You could also decide to donate $10,000 a year to your favorite organization (or organizations) to help them with general operating costs. Recurring donations can be in the form of cash, stocks, or other assets.
If you want to make a structured plan for future donations, here are more complex charitable giving vehicles you might consider.
Donor Advised Funds
A donor advised fund (DAF) can give you immediate tax advantages with time to make strategic decisions about your giving. You set up a designated charitable account and fund it as you like with cash, stocks or other assets. You can receive a tax deduction on the full fair market value of your funding in the year you fund it but, since there are no mandatory annual distributions, you can take as much time as you want to hand out your donations.
DAFs are popular because they are inexpensive, administration is simple, assets can grow tax-free in the account, and multiple donors can contribute to the fund so you can easily involve the whole family.
Private Foundations
Private foundations are separate legal entities that are generally set up to support long-term philanthropic goals.
You can fund a foundation with a broad variety of asset types, and as a donor you have control over the investment and granting decisions. Private foundations have more freedom in granting than other charitable giving vehicles and can distribute donations to individuals — not just to qualified charitable organizations. But they must distribute at least 5% of the assets each year.
A foundation can be passed down from generation to generation and involves any number of family members. Administration can be complex but can be handled by family members or a hired professional.
Charitable Trusts
There are two common types of irrevocable charitable trusts that you can set up and fund, depending on your goals.
- A Charitable remainder trust (CRT) pays you or your beneficiaries a specified income for a set period or for life, after which the remaining funds are distributed to designated charities.
- A charitable lead trust (CLT) is essentially the reverse: The trust distributes regular donations to your chosen charitable organizations for a specific period before giving the remaining assets to your family or other beneficiaries, free of estate and gift taxes.
Both types of trusts can be effective ways to provide for yourself or your family and help reduce your taxes, while supporting the causes you care about.
Endowments
An endowment is a special type of charitable gift that comes with specific conditions you can set. Intended to be invested to generate a future income stream, the investment objectives and charitable objectives are usually specified by the donor. For example, if you are giving an endowment to a university, you could specify that the recipient invest the funds only in an S&P 500 ETF and investment grade bonds, to provide scholarships for needy students attending the Business School.
4 Tips for a Successful Charitable Giving Strategy
As you begin to build your charitable giving strategy, you should consider these four tips:
- 1. Research charities carefully. Look for a mission and values that align with yours, a history of results achieved, transparency about how donations are used, financial health and solid management, sufficient staff, and a good reputation with donors, recipients and other organizations.
- 2. Diversify your contributions. If you have the funds to do so, you may be able to make the biggest impact by spreading out your support, for example among local and global organizations.
- 3. Document your strategy. You’ll want to review your plan with your financial advisor periodically to make sure it’s working effectively to meet your goals. If it isn’t, this will allow you to adjust to improve your impact and/or tax benefits.
- 4. Spread the word. Don’t forget that we can do more by working together. If you have a cause and an organization you’re passionate about, tell others. Give reviews, let your friends know. It’s a simple way to multiply your impact.
Charitable Giving and Tax Deductions
One of the most significant benefits of charitable giving is its potential tax advantages. But IRS rules for deducting charitable donations are both specific and complex, and they vary considerably, based on the type of assets to be donated, the amount, timing and structure you set up.
It’s important to understand all the tax consequences before you finalize your giving plan and be sure to consult with your tax or financial advisor, who can help ensure that your plan effectively meets your goals.
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Brady Harlow is not affiliated with Cetera Advisor Networks, LLC.
This article not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
