We’ve been working with clients across the country for over 30 years, and we understand how important it can be to share your success by donating to charitable organizations, whether it’s through volunteering time or giving money. Once this charitable intent is determined, the next step is to determine how best to give. The following steps can help you identify the most efficient way to give, according to your circumstances.
Step 1 – Identify a cause that’s important to you
From supporting education and providing funds for cancer research, to protecting the environment and ensuring human rights for all, the list of worthy causes is endless. What’s important to remember when being philanthropic during your lifetime is that you have complete control over who receives your money or time.
Step 2 – Decide if you want to volunteer your time, money, or both
Being philanthropic doesn’t always mean writing a check. Many people give their time or expertise to organizations. This includes volunteering at events, raising money, participating on the board of directors, committees, etc. Some volunteer and also give money to organizations that are important to them. For many, they may not have the time or ability to volunteer due to a number of circumstances, however they choose to share their financial resources instead.
Step 3 – What are your funding sources?
If you decide to give part of your wealth, then the next step is determining how best to fund your gift. Do you have cash? Taxable investment accounts with securities (stocks or bonds) that have appreciated in value? Do you have a retirement account? Do you have a life insurance policy?
Step 4 – Is this a one-time or recurring gift, and do you want to make it during your lifetime or from your estate?
These are important considerations, as they impact the method you use to make your donation. For some of the methods listed in step 5, you can make a one-time, planned gift that can be distributed over many years to one or many charitable organizations. The giving method may be different for a one-time gift or recurring annual gifts to an organization or to charity in general.
Decisions on whether to give your financial resources during your lifetime or from your estate are impacted by a number of considerations. Will it impact your ability to stay independent of family in retirement if you make a large gift now? Careful consideration of your own situation may allow gifts now, or it may be more prudent to give from your estate.
Step 5 – Is the organization you’re giving to a public or private charity?
This impacts how much of the gift you can deduct on your taxes. According to the IRS, the following are considered public charities:
- Qualified medical research organizations affiliated with hospitals
- Schools, colleges and universities
Community foundations, the American Red Cross, and the United Way are examples of public charities.
Public charities must:
- Have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities.
- Receive income from the conduct of activities in furtherance of the organization’s exempt purposes.
- Actively function in a supporting relationship to one or more existing public charities.
Private charities by contrast typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources). The primary activity of most private charities is the making of grants to other charitable organizations and to individuals. A family foundation is an example of a private charity.
In general, gifts to public charities have a higher allowable tax deduction – up to 50% of your adjusted gross income (AGI) if cash or up to 30% of AGI if appreciated securities. Gifts to private charities are deductible up to 30% of AGI for cash and 20% of AGI for appreciated securities.
Step 6 – Find the most effective giving method for your circumstances
There are many ways to share your financial resources with a charity(s), and to do it in a tax-efficient manner.
- Checkbook philanthropy – One-time gifts often are made by writing a check to a charitable organization, or putting a donation on your credit card. These can be monthly or annual gifts.
- 50% of AGI for public foundations
- 30% of AGI for private foundations
- Appreciated securities – Many organizations accept securities that you transfer to them. This requires you to submit paperwork to the custodian of your taxable brokerage account (i.e., Charles Schwab, Fidelity, TD Ameritrade, etc.) requesting that the specific securities are sent. This is treated as a one-time gift, although you can do it annually.
- Donor-advised fund – Unlike transferring appreciated securities directly to an organization, a donor-advised fund allows you to open an account and transfer the securities and receive a tax deduction in the year you do it. However, you can decide how and when you want to distribute the funds to charitable organizations over the coming years. This strategy provides more flexibility in planning as you can make a one-time gift to a donor-advised fund and avoid realizing the capital gains and be able to distribute on your terms in future years.
- Personal or family foundation – Do you have a goal to leave a legacy? A private foundation can provide the opportunity to involve family members in philanthropic projects and flexibility in charitable giving.
- Charitable remainder trust – This is an irrevocable trust designed to generate a potential income stream for you or other designated beneficiaries, with the remainder of the donated assets going to the charity of your choice.
- Charitable lead trust – This is an irrevocable trust designed to provide income payments to at least one charitable organization for a period measured by a fixed term of years, the lives of one or more individuals, or a combination of the two. At the end of this period, the trust assets are either paid back to you the grantor or to one or more designated beneficiaries.
- Qualified Charitable Distribution – If you are at least age 70 ½ and have a traditional (pre-tax) IRA, you are eligible to donate your required minimum distribution (RMD) to a charity of your choice and receive a 100% deduction for the first $100,000 of your distribution. This means that no matter what your income is, if you give up to $100,000 of your RMD, you will not owe income tax on any of that distribution. This is more advantageous than withdrawing the funds, paying taxes and then donating to charity and receiving the charitable deduction.
- Life Insurance – You can also use a life insurance policy as a vehicle to give to charity from your estate by naming an organization as the beneficiary of your life insurance policy.
- Name an organization as the beneficiary of your retirement account – You can name a charity as the beneficiary of your retirement account, and if it’s a traditional (pre-tax) IRA, they receive 100% of the value of the account. This is in comparison to receiving the after-tax value, as traditional IRAs owe income taxes on distributions.
Charitable gifts you can’t deduct in the current tax year can be carried forward five years.
We recommend that you speak with your advisor to discuss any charitable intent and determine which giving strategy makes the most sense given your circumstances.
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Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.
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