While gifts to charities tend to ramp up during November and December, any time of year is appropriate to give, either directly or by choosing among a variety of structured charitable giving vehicles.
Regardless of which option you choose, any gift to a 501(c)(3) charitable organization offers similar tax benefits for donors:
- Donations may be tax deductible if your annual itemized deductions are higher than the standard deductions of $24,000 for couples/$12,000 for individuals.
- Giving highly appreciated assets may spare you from paying capital gains taxes when these assets are sold by the charity.
- Donated assets are removed from your estate.
- For gifts of valuable assets such as vehicles, artwork or collectibles, a professional appraisal may be required.
Note: Whichever option you choose, the actual gift must be made by the end of a calendar year to count as a donation for that year. For example, if you mail a check on December 26, 2019, it will be counted as a 2019 donation even if the charity doesn’t cash it until January 2020. (To be safe, you may want to ask the charity to send you a receipt recognizing the gift as a 2019 donation).
If maximizing the tax benefits of charitable giving is a priority, you may want to consult with your accountant or tax preparer to figure out which options address both your tax-planning and philanthropic priorities.
Here is a high-level summary of the most common charitable giving options.
Description: A gift of cash, securities or other items of value.
- Easiest way to get end-of-year charitable tax benefits.
- Charity can put gift to work immediately.
- Make your donation by year-end to qualify for a charitable tax deduction that that year.
- Organization should provide a receipt upon request.
- Unless you donate to a specific fund (i.e., the Building Fund), you’ll have little say over how the money is used.
Description: A gift made to a charitable organization when the donor passes away.
- Easy to set up through a will, trust, or beneficiary designation.
- May be good choice for gifts of retirement funds (e.g., IRAs), since the charity won’t have to pay taxes on distributions from these accounts.
- Income and estate tax deduction deferred until your death.
- Inflation may reduce the future value of a “fixed dollar” bequest.
- You won’t get to see your donation put to use during your lifetime.
Description: A donor-funded account administered by a public charity that offers you the ability to recommend grants to other charities. Donor-advised funds can be established during your lifetime or at your death and can be funded with cash, securities, life insurance or annuities.
- You receive the tax benefits of a charitable donation now while being able to decide which nonprofit organizations to make grants to at a future time.
- Accounts can often be established with donations as low as $5,000.
- You or other authorized members of your family can recommend charities to receive grants.
- You have no administrative responsibilities.
- Some donor-advised fund providers may allow your investment adviser to custody and manage assets in your account.
- You can designate others to serve as donor advisors after your death.
- Account and administrative fees can reduce amount available for grants.
- Grant recommendations must be approved by the Fund’s trustees.
- Donors generally don’t have direct control over investment decisions made by the Fund.
- Some donor-advised funds don’t allow investment advisors to manage assets in individual accounts.
Description: A community foundation is a public charity established to meet the needs of its local community or region. Donations are held in a collection of individual endowment funds, which can be named after the donor or the donor’s family.
- You receive the tax benefits of a charitable donation now while being able to recommend grants to nonprofit organizations at a future time.
- Donations receive the same income tax deduction benefits as gifts to charitable organizations.
- Donors can recommend grants to specific local charities or place restrictions on how their funds will be used.
- Donors have no administrative responsibilities.
- Administrative fees can reduce amount available for grants.
- Grant recommendations must be approved by the Foundation.
- Donors do not have direct control over investments in the established funds.
- Community foundations may limit grants to approved local or regional charities.
Private Family Foundation
Description: A trust or corporation set up as a grantmaking entity by a family. It can be funded with cash, securities, property, private business shares or other assets.
- In corporate form, family members can manage the foundation directly, including oversight of investment decisions and evaluation and approval of grant requests.
- In Trust form, family members can cede direct control of operations to the Trustee and have as much or as little involvement in grantmaking as they want.
- The foundation can be set up to operate in perpetuity or to be dissolved at a future point in time.
- Gifts to private foundations offer fewer tax benefits compared to donations to 501(c)(3) organizations.
- Administration of a private foundation can be expensive and time-consuming.
- Foundations established as corporations must be operated and managed in accordance with state laws. Questionable practices (such as using assets to pay high salaries to family members who only work for the foundation part-time) may subject directors to IRS and state penalties.
In addition, to avoid IRS penalties, private foundations must:
- Distribute at least 5% of the foundation’s assets each year to qualified public charities.
- Restrict grants to nonprofit organizations that “serve the public good,” meaning that gifts to political candidates or PACs are prohibited.
- Pay an annual 2% excise tax on net investment income.
- Avoid using foundations assets for grants or other activities that could personally benefit founders.
Charitable Remainder Trust
Description: A charitable remainder trust provides you, your spouse, or a family member with income payments for a term of years or for life. At the end of the term, the remainder interest is donated to one or more charities.
- Typically funded with appreciated securities or property that enable the donor to avoid paying capital gains taxes when the assets are sold and reinvested.
- Donated assets are removed from the donor’s estate and thus are not subject to estate taxes.
- Trust investments may be managed by your investment adviser.
- Initial gifts are irrevocable.
- Gifts are not fully tax deductible; qualified deductions are based on a complicated formula that involves subtracting estimated future trust income from the value of the gift.
- Income payments are taxed as ordinary income.
- Donors and beneficiaries do not have access to principal.
- Income payments may fluctuate.
Charitable Lead Trust
Description: An irrevocable trust established by an individual (grantor) that distributes income to a charity over a predetermined period. When the trust is terminated, the remaining assets are distributed to the donor’s heirs.
- Commonly used to reduce or avoid potential gift or estate taxes when assets are transferred to heirs.
- Certain structures may offer partial charitable deductions for the grantor.
- The estimated value of the transferable interest is reduced by the present value of the income anticipated to be paid to charity.
- In some structures, grants may have to pay taxes on investment income generated by the trust, making it a less-than-ideal option for liquidating appreciated assets.
- The two main structures—grantor and non-grantor trusts—offer different tax benefits that need to be carefully considered.
- Trusts can be expensive to set up and maintain.
Determining which option(s) makes sense
Choosing whether to give directly or whether to use one or more charitable giving vehicles (or a combination of both) should reflect your giving style, your tax situation, and your legacy planning priorities. Discussing the pros and cons of these options with your accountant, attorney or financial advisor can give you greater confidence in knowing that your decision will make financial sense while allowing you to support the charities and causes that matter most.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer when you are considering any particular charitable giving strategy.
Chris Gullotti is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or firstname.lastname@example.org.
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