How to responsibly allocate assets with philanthropic and financial goals in mind
Americans are characteristically inclined toward being generous—giving precious time, sharing practical knowledge, and donating money to assist those less fortunate in our society. While our generosity is personally rewarding, the charitable contributions we make entitle us to benefits provided for in the tax code—one being the tax-saving advantages associated with our financial support of the causes we care deeply about.
With annual changes in federal tax laws and varying economic forecasts, coupled with end-of-the-year financial tidying, now is a good time to take stock of your personal finances and make some decisions that may have been on hold. Consulting with a financial advisor or estate-planning specialist is a wise first step. You should also discuss how their fees are structured for the expertise you will require.
Estate-planning requires a strategy for maximizing and preserving assets, minimizing tax obligations, maintaining overall financial health, and reaching long-term goals. Part of the process involves a well-developed plan for charitable giving whereby your gifts allow you certain tax benefits—if you itemize deductions on your federal tax return and the donations are made to IRS-approved, “qualified charitable organizations” that exist and operate exclusively to support public purposes, such as tax exempt, 501(c)(3) nonprofits.
Before giving to any charity, check its financial statements to ensure donations are responsibly managed and spent primarily on its programs and stated mission—not on salaries and fundraising. Charity ratings, statistics on charitable giving, and a host of other useful information is available on various websites.
There are many options for supporting “qualified” charities and benefiting from tax savings; advantages and tax implications depend upon the type of gift, how it’s gifted, and other considerations. Each type of donation has annual limits on the amount you can deduct.
Whatever your long-term charitable or financial goals may be, a financial professional can guide you through the maze of options and suggest the charitable-giving “vehicles” most suited to your particular needs and desired outcomes. Here are some options to consider when structuring a plan to preserve your wealth, create a lasting legacy, and provide for your heirs—so that they, too, can show generosity through meaningful contributions of their own.
In planning your gifting strategy, you’ll need to consider:
1. Where you want your assets to go 2. Who your beneficiaries will be 3. How your assets will be titled, particularly when it comes to ownership of trusts 4. Asset management 5. Whether gifts will be outright, term-limited, or deferred 6. Whether gifts provide income for you, as well as benefit your heirs and charity 7. Tax implications, and make decisions about many other important factors.
Vehicles of Giving
Note: Due to the complex and, often, fluid tax code, it is highly advisable to consult a tax professional or fiduciary to confirm the options outlined below.
Outright Gift: The most common gifting option, providing immediate support to charity and maximum possible tax deduction for you. Donations are usually made in cash and written checks (but can be securities or other assets).
Charitable Bequest: A (revocable) planned gift whereby charity is made a beneficiary in your will or a designated beneficiary of your life insurance policy, qualified retirement plan, or other asset. It supports charity after your death and may reduce estate taxes.
IRAs and Qualified Retirement Plan Assets (401(K), 403(B), etc.): Gifting these can reduce potentially high taxes if the donor doesn’t expect to use all the assets while still living or has other ample assets (securities, etc.) by 1) naming charity the beneficiary of some/all can save taxes and preserve more non-retirement plan assets, or 2) designating that the plan’s remaining termination-date assets fund a gift plan that pays family/loved ones for life, and charity gets the gift plan’s remaining termination-date assets. Benefits include federal and state tax savings, and preservation of non-retirement plan assets.
Life Insurance Policies: If payments are up to date, the cash value is significant, and there are no outstanding debts against it, a policy can be gifted to charity, which may 1) cash it in for immediate use or wait for the termination-date cash value, while the donor benefits from tax savings and no change in cash flow; or 2) become the policy’s beneficiary and upon its termination get some/all of the death-benefit proceeds, while the donor benefits from tax savings, no change in cash flow, and the option to take back the gift, if necessary.
Publicly Traded Securities (Shares of Stock, Mutual Funds, etc.): May be an option if the securities were purchased at least one year ago, have increased in value significantly, or generate little or no income. Shares are transferred to a charity and are typically either gifted outright or made a gift whereby you receive lifetime payments. The benefit is reduced income and capital-gains taxes.
Pooled-Income Fund: Provides donor income for life and saves on taxes. An irrevocable gift of cash or securities goes into the fund, the donor gets annual payments of their share of the net income for life, and the share then goes to charity.
Charitable Gift Annuity: Charity makes fixed, lifetime payments to donors in exchange for irrevocable gifts of cash or securities. A way of maintaining or increasing current income, earning tax-free income, receiving payments for life, or saving on income and capital gains taxes. Principal remaining when the gift annuity ends goes to charity.
Charitable Flip Unitrust: A vehicle for making a large gift now that will supplement your future retirement income and reducing income or capital gains taxes if you’re thinking of gifting $100,000 or more. Cash or securities are transferred to your flip unitrust, which makes payment to you or your designee during its term. You’ll first be paid the lesser of a percentage of its value or net income at first, and down the road you’ll receive a percentage of its value annually, no matter how much net income is earned. Assets that remain at the flip trust’s termination go to charity. Flip trusts typically provide lifetime payments and tax savings.
Charitable Lead Annuity Trust (Irrevocable): Designed to shift wealth to heirs or named beneficiaries in a tax-efficient manner, especially in a low-interest-rate environment.
Charitable Lead Unitrust (Irrevocable): Allows the transfer of assets to heirs or named beneficiaries at reduced tax costs, and charity receives payments for a fixed term.
Charitable Remainder Annuity Trust (Irrevocable): A custom-designed trust that gives you a fixed income for a fixed term or life and an income-tax deduction, and provides a future gift to charity.
Charitable Remainder Unitrust (Irrevocable): A custom-designed trust that gives you a variable income for a fixed term or life and an income-tax deduction, and provides a future gift to charity.
There are many other vehicles for leaving a lasting legacy through charitable giving—each with distinct advantages and structured for reaching specific goals, depending on one’s needs and desired outcomes—such as donor-advised funds, endowments, and private foundations, to name a few.
