“What we have done for ourselves alone dies with us; what we have done for others and the world remains and is immortal.” — Albert Pike, American attorney and soldier, 1809-1891.
Question: My wife and I make charitable contributions by check each year to several organizations. A friend mentioned that there are other ways to make donations that might give us more tax advantages. Can you explain what some of those approaches might be?
Answer: Yes, there are several ways to simplify and potentially improve the tax consequences of your charitable donations. I will give you an overview of some of the most frequently used methods.
Donor-Advised Funds (DAFs)
DAFs are set up with financial institutions. Most often, they are set up as family foundations. That might sound like a hassle to establish, but it’s actually very easy. Once they are set up, DAFs are easy to maintain, very flexible and relatively inexpensive. For these reasons, the popularity of DAFs has grown in recent years.
Simply stated, if you set up a DAF, you would make an irrevocable contribution to an account opened in the name of one or more donors and held in custody by a nonprofit, typically a charitable organization founded by a financial services company. As the donor, you then choose when, how and to which eligible charities you’d like to designate to receive money from your fund. The custodian vets charities for IRS eligibility and send out grants at your request.
You get a tax-deduction for the full amount of the fund contribution in the year the contribution is made, and you may donate the money to various organizations over many years. As the donor, you avoid capital gains and estate taxes on the original contribution, and as this contribution is inside a tax-exempt vehicle, any growth will be tax-free. DAFs are also used for estate planning and may be designated as a beneficiary for retirement plans, revocable and living trusts, charitable trusts or life insurance.
DAFs can be established with a minimum contribution of $10,000 and additional contributions can be made in subsequent years. You are not required to make additional contributions to your DAF; that’s solely your decision.
Your CPA will love you if you donate to multiple organizations each year via a DAF! The record keeping and paperwork for your charitable contributions is simplified and coordinated by having all activity coordinated in one entity.
DAFs also are a great way to pass on your philanthropic values. Parents or grandparents often establish family DAFs and then bring everyone together during the holidays or other occasions to decide which organizations will receive the charitable donations. Cost, ease, tax planning and family involvement are among the benefits of DAFs.
Charitable trusts are more complex, take on a variety of forms, and require more extensive planning and professional oversight than DAFs. However, they can be customized to meet specific tax and estate planning objectives. Here is a brief and broad overview of these gifting methods.
- Charitable Remainder Trusts (CRTs) pay income to you (and/or a beneficiary) during your life, and provide you with income-tax and gift–tax deductions. Upon your death, the remaining trust assets go to the designated charity. Depending on the type of CRT you establish, it can either pay fixed dollar amounts or a fixed percentage of the assets in the trust.
- Charitable Lead Trusts (CLTs) are somewhat the reverse of CRTs as they pay income to an eligible charity during the grantor’s lifetime. When the grantor dies, the assets are distributed to specified beneficiaries, and like CRTs, CLTs can also pay either fixed dollar amounts or a fixed percentage of the assets in the trust.
Values and Valuables
As we mature, it is common to reexamine our priorities. The Greatest Generation, Baby Boomers, Gen Xer’s and Millennials have all lived through dramatic societal, technological and economic changes. It isn’t uncommon for people to reflect on their economic good fortune and develop a desire to “pay it forward” by donating to organizations that support their values. A core sense of one’s identity is linked to values and not only “valuables.”
As you now know, there are plenty of ways to give beyond simply writing a check. Working with a trusted financial advisor can help you determine the most appropriate and efficient ways to contribute and maximize what you get out of giving. Stay focused and plan accordingly.
Always consult with your tax, legal and financial professionals before establishing any type of charitable gifting vehicle. Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author’s opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.
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This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org Website: www.raymondjames.com/InvestmentInsights