Five Options for Charitable Giving
What are some options for Charitable Giving ?
There are many ways to give charitably aside from simply writing a check to the desired organization. While check writing is likely the easiest way to give, it may be more beneficial to choose a different charitable giving vehicle. Five other charitable vehicles are donor-advised funds, private foundations, charitable lead & remainder trusts, cash/check/or credit, and qualified charitable distributions. The potential for tax benefits and growth of the donated money, ability to donate anonymously or name successors, and a variety of other factors are some features that make choosing charitable giving vehicles an important endeavor.
1. Donor Advised Funds
A donor advised fund (DAF) is a charitable giving vehicle controlled by a public charity that manages donations for organizations, families, and individuals. A DAF can be opened with as little as $5,000 and it allows donors to make irrevocable contributions to an account which then makes distributions to IRS-qualified public charities. You will receive a deduction for the amount of the contribution up to 60% of your adjusted gross income (AGI) for cash, or 30% for appreciated assets with the amount above carried forward to future years.
A primary benefit of choosing a DAF is that money can grow without a tax on investment income and there is no minimum amount that must be gifted out in any given year. A DAF includes additional benefits such as the ability to support charities anonymously and name successors or charitable beneficiaries. Finally, DAFs also allow the donation of non-cash items such as appreciated securities or business entities. You may consider contributing to a DAF when you want a turnkey solution with low costs and potential to grow your contribution tax-free over time.
2. Private Foundations
A private foundation allows donors to support organizations under the condition that grants are made charitably. The main benefit of private foundations is the flexibility that the donor has over the foundation. While private foundations do have growth potential, there is an annual 1 or 2% tax on net investment income as well as requirements to gift 5% of the net investment assets annually. Donors may receive income tax deductions up to 30% of AGI for cash and 20% of AGI for appreciated assets with the remainder carried forward to future years.
While private foundations permit the ability to name successors, there is not an option to support charities anonymously. If you want to operate a charitable organization and potentially employ staff, hire investment managers, actively manage grant-making, or sponsor charitable events, a private foundation may be the right charitable giving vehicle for you.
3. Charitable Remainder Trusts
Charitable Remainder Trusts are an irrevocable trust where income is first distributed to the beneficiary of the trust for a specified period of time and the remainder is donated to one or more charitable organizations. Donors make a partially tax-deductible donation and begin receiving an annual income stream for the donor or a different named beneficiary. After the donor or beneficiary passes or a stipulated time span ends, the remaining assets are distributed to charitable beneficiaries including public charities, the family’s private foundation, etc. Charitable remainder trusts have additional benefits such as the ability to support charities anonymously and name successors. However, these trusts are irrevocable, meaning that they cannot be changed or terminated without the beneficiary’s permission.
A Charitable remainder trust is particularly beneficial when transferring highly appreciated property. The trust can sell the donated property without paying capital gains tax and invest the proceeds in an income producing diversified portfolio. If you are looking to generate income and eventually pass on a remainder interest to your heirs and different charities, a charitable remainder trust may be a good option for you.
4. Check, Cash, or Credit
Cash, check, or credit donations can be made to public charities, private foundations, and individuals. Unlike the other charitable giving vehicles which require consideration, time, and thought, donating by cash, credit, or check, is simple and easy. While there is no growth potential of investing the money or option to donate non-cash items, there is a 60% (of AGI) income tax deduction in the given year with the remaining deduction carried forward if needed. Due to the nature of donating using cash, credit, checks, there is no option to support charities anonymously or name successors. You may want to consider this way of charitable giving if you plan to make one-off donations and manage your own donation receipts at tax time.
5. Qualified Charitable Distributions (QCD)
IRA owners age 70.5 or older may contribute up to $100,000 of their required minimum distribution (RMD) to public charities. Using a QCD is a tax-savvy strategy that allows you to transfer up to $100,000 per year from your IRA directly to a qualified charity which lowers taxable income, resulting in a lower overall tax liability. This strategy is particularly useful if you are not dependent on your RMD for income and want to reduce your taxable base in any given year.
Charitable giving is a powerful way to support organizations and causes you believe in. In order to make the greatest possible impact from your donation and receive additional benefits, it is crucial that you make careful considerations regarding a charitable giving vehicle. Donor advised funds, private foundations, charitable lead & remainder trusts, cash, check, or credit, and qualified charitable distributions all offer varying benefits. To learn more about choosing the right charitable giving vehicle for your values and goals, consult your advisor at Heck Capital.
Authored by Michael Bogard, CFA on October 25, 2018
About the Author: Michael Bogard, CFA is a Business Development / Client Relationships Senior Associate at Heck Capital Advisors. Michael earned the right to use the Chartered Financial Analyst® (CFA®) designation after completing the program in 2018, fulfilling the work experience requirements, and gaining acceptance as a member of the CFA Institute. The Chartered Financial Analyst® (CFA®) charter gives a strong understanding of advanced investment analysis and real-world portfolio management skills. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.