Among the most important decisions for a donor to make are where to give (giving vehicles), when to give, and what to give. This article aims to address each of these variables to help guide the conversation as to which charitable giving option fits best.
Where to Give
Donor-advised funds. Donor-advised funds (DAFs) have become the most popular charitable giving vehicle in the United States. DAFs provide donors with an immediate tax deduction, the flexibility to recommend grants to qualified charities over time, and tax-free growth of assets. Since DAFs are established at sponsoring public charities, that organization will handle all accounting, compliance, and administrative responsibilities, thus giving donors the feel of a private foundation without the regulatory burden.
Private foundations. Private foundations remain a cornerstone of long-term philanthropic planning. Families appreciate the flexibility, control, and structure that foundations provide. A foundation’s board (often composed of family members or trusted advisors) can oversee grantmaking, charitable programs, and long-term investment strategies. While at least five percent of net assets must be distributed annually for charitable purposes, foundation assets grow in a tax-preferred environment. Due to the heightened IRS oversight and regulatory requirements related to private foundations, families often work with professional administrators to ensure compliance and preserve the foundation’s long-term viability.
Charitable remainder trusts. Charitable Remainder Trusts (CRTs) remain a highly effective planning tool for donors who wish to support charity while also converting appreciated assets into lifetime income. A CRT provides an income stream to the donor or spouse for life or a term of years, after which the remaining assets pass to charity, a donor-advised fund, or a foundation. CRTs offer partial income-tax deductions, capital-gains bypass, and estate tax benefits.
Supporting organizations. Supporting organizations are created to support one or more specific charitable organizations. They offer many of the benefits of private foundations, such as family board involvement and long-term legacy planning, while also providing more favorable tax treatment and fewer regulatory restrictions. Supporting organizations can operate programs, make grants, and hold long-term investments.
Volunteer and non-financial contributions. Millions of Americans volunteer their time and skills each year, contributing an estimated economic value exceeding $160 billion. Volunteering not only strengthens communities, it can help donors better understand the needs of the organizations they support and often inspires more strategic financial giving.
When to Give
The timing of ongoing charitable giving should be a regular topic of discussion between you, your CPA, and tax counsel. For those contemplating the sale of significant assets, the timing of charitable giving is especially important as a pre-sale gift of assets to a charitable organization can generate significant savings.
Donating assets before a sale is legally binding can allow donors to receive an income-tax deduction based on the fair market value of the gifted interest. Donors also typically bypass the capital gains tax that would have been owed if the shares were sold first and the proceeds donated later. This often results in a larger charitable gift and a more favorable tax outcome for the donor.
What to Give
Cash gifts remain the most familiar and straightforward option. With a cash gift to a charitable organization, donors may deduct up to 60% of their adjusted gross income, with unused deductions carried forward for up to five additional years.
Increasingly, donors are also discovering the advantages of giving appreciated assets such as publicly traded securities, real estate, business interests, and other non-cash holdings to a charitable organization. These gifts often provide a deduction equal to the fair market value of the asset and allow donors to bypass capital gains tax that would otherwise be incurred if the asset were sold. This can significantly increase the value of the charitable gift while reducing the donor’s tax burden. Note that deductions for gifts to a private foundation are generally limited to cost basis, except for certain assets like public stock or cash. Gifts of appreciated assets to a DAF or public charity are generally subject to a 30% adjusted gross income deduction limit, with the same five-year carryforward available. Note that non-cash gifts valued above $5,000 require a qualified appraisal unless the gift consists of publicly traded securities.
Ultimately, it is advisable to discuss specific facts and circumstances with tax and legal counsel to determine the best course of action to achieve charitable goals and objectives.