If you are considering giving, put away the checkbook and that debit card. There are better and more effective giving strategies out there. Intelligent giving meets your philanthropy goals and also allows for flexibility, control, maximum tax impact, and the ability to create a legacy. To give like Bill Gates you should consider using a charitable vehicle that can meet your personal and charitable goals.

Here are some of the top personal and charitable goals we hear from our clients:

  • Reduce your tax burden in an unusually high-income year.
  • Avoid taxes on highly appreciated investments.
  • Donate assets like cryptocurrency.
  • Balance your need for personal consumption and philanthropy.
  • Leaving a legacy that outlives you.

By gifting directly to a charity you may simplify your gifting experience. However, you may not accomplish many of these goals.

Consider these intelligent giving strategies instead:

  • Donor-Advised Fund
  • Charitable Trusts
  • Private Foundations

If you still struggle to figure out the best charitable strategy after reading this article then we are here to help!

Donor-Advised Funds

A donor-advised fund (DAF) is a charitable account provided by a charitable entity. A DAF is a 501(c)(3) organization. Charles Schwab, Fidelity, and Vanguard all have established popular DAFs that you can use. DAF’s operate like an investment account in which you can contribute, grow, and distribute your assets.

There are several reasons why DAFs make for effective giving.

  1. You can gift large sums of money and get the tax deduction the same year. You don’t have to distribute those assets to your destination charity that year. This is especially useful for those unusually high-income years. Your charity of choice, like a small church or a budding charity, may not be ready to receive a large donation. You may not feel comfortable distributing all your charitable force in one year.
  2. You can invest and grow your charitable gift tax-free. Donor-advised funds offer a wide lineup of investments to choose from. You can even hire a professional money manager at a high enough balance.
  3. DAFs take most assets. You are not limited to donating what your charity of choice can handle when you use a DAF. This means whether you have highly appreciated stocks, equity in a pre-IPO company, cryptocurrency, or even planes, it all goes!
  4. You can leave a legacy. DAFs allow you to continue giving beyond the grave. You have two choices. Either you can elect a successor to continue your gifting mission, or you can set up a perpetual gifting scheme. In the latter, you would choose which charities to gift to, how much annually, and your investment strategy.

Downsides of a DAF.

  1. Your donated assets may be sold. Your favorite stock or cryptocurrency may not be your investment in the DAF. A DAF offers a sufficient but limited investment lineup. In addition, there are administrative fees for the sale of complex assets.
  2. There may be restrictions. Restrictions imposed by the DAF can include the minimum and maximum you can donate and the maximum number of grants you can make per year.
  3. Your gift is irrevocable. Once you make your gift you will not receive any economic benefit from it. While this may seem like an obvious part of the charitable process it doesn’t have to be so.
  4. DAF’s have administrative fees. Donor-advised funds are not free. Their fees can be substantial especially at smaller balances.

Charitable Trusts

If you want your cake and eat it too, then a charitable trust may be the thing for you. A charitable trust provides an immediate tax deduction when you make the donation. In addition, it allows you to personally enjoy the benefits of these assets. There are two flavors of charitable trusts. A charitable remainder trust (CRT) and a charitable lead trust (CLT).

Charitable Remainder Trust

A CRT provides income to you or your chosen beneficiary while simultaneously getting a charitable deduction and providing a charitable gift. The ability to hit on multiple goals is what makes this an intelligent giving strategy.

You can choose how much the CRT will provide in income every year. Additionally, you can choose for how long. Whether 20 years or the lifetime of the beneficiary. At the end of the term, your charity of choice will receive the balance of the charitable trust.

It is important to understand that the income the beneficiary receives will be taxable to that beneficiary and will follow special tax rules.

Charitable Lead Trust

A CLT does the opposite of a CRT. Your charity of choice receives an annual income and your beneficiary of choice receives the proceeds at the end of a chosen period of time.

This can be an effective giving strategy, however, you need to understand the two types of CLT. A CLT can either be a grantor or non-grantor trust. With a grantor trust, you don’t own annual tax on the income paid to the charity. But you don’t get a charitable deduction when you create the trust. Alternatively, a non-grantor trust gives you a charitable deduction when you create the trust, but you will owe tax on every distribution to the charity.

CLT is the superior choice to the CRT when your primary objective is to pass money on to your beneficiaries and to reduce potential estate tax.

Charitable Trust Consideration

Whichever charitable trust you think is right for you there are a few things to know.

  • You don’t have to sell the asset you donated.
  • A charitable trust executed through a brokerage has a much larger lineup of investment options.
  • You need to hire a trust and estate attorney to put together a charitable trust. This can be significantly more expensive than a donor-advised fund.
  • The charitable deduction is affected by current interest rates. A discount formula, which uses short-term interest rates, is applied to the donated asset to evaluate the charitable deduction. Lower interest rates improve the value of the deduction.

Private Foundations

A private foundation is a charitable organization that you establish yourself. A private foundation usually consists of staff and a board of directors/trustees. These employees help with receiving contributions, managing the assets, and distributions to charities.

There are two aspects that make this an effective giving strategy. First, private foundations are excellent vehicles for setting up a legacy. The board of trustees you install will continue to execute based on your original wishes. Second, unlike donor-advised funds and charitable trusts, you have complete flexibility on how you choose to distribute your assets. This includes giving grants and creating scholarships.

Despite those benefits, a private foundation is much more burdensome to use than a donor-advised fund or a charitable trust. You need to hire staff, there are required annual filings and ongoing legal costs. Most importantly the deductions to a private foundation are limited. You can donate up to 30% of adjusted gross income (AGI) for cash and 20% of AGI for long-term publicly traded investments. This is opposed to 60% of AGI for cash and 30% for investments when donating to a DAF and charitable trusts.

Summary

To start your effective giving strategy you need to think beyond giving directly to a charity with a check. You should ask yourself these questions.

  • Do I have an unusually large tax burden this year that I want to reduce?
  • Are there appreciated assets that I can give to avoid capital gains tax?
  • Do I have complex assets that I would prefer to donate?
  • Can my favorite charity handle a large one-time donation?
  • How important is it that my charitable gift continues to provide a benefit beyond my lifetime?
  • Do I need income or do I want to provide for my beneficiaries?

Whatever your charitable goals are, we can help you decide how to create the most intelligent giving strategy. Schedule an intro call with us now using THIS link and get started on your charitable giving.

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