Give a little bit: Charitable gifts and when to make them

by Badgley Phelps | Nov 18, 2016

Charles Dickens said, “No one is useless in this world who lightens the burdens of another.” While charitable giving helps alleviate tax obligations, we find that our clients tend to give for reasons more in line with the Dickens quote. They want to lighten burdens of others. They want to elevate their community. They want to make a difference.

When considering how, when and where to give, it’s important to think about which giving option fits best with your goals. Here are the main types of gifts and when to make them.

Direct gifts

This is the most common type of contribution, with donors giving to chosen charities via cash or check, online or through a stock transfer. It is quick and easy, providing an immediate tax deduction and requiring no long-term commitment. That said, these types of gifts are often reactionary—such as a contribution when prompted at a fundraising event—instead of part of a well thought-out philanthropic plan that could benefit you and your family in the long term.

Indirect gifts

Donor-advised funds (DAFs) and private foundations are two ways to establish a longer-term giving strategy. DAFs and foundations might be good options for those wanting control over investments and grant-making, as well as those wanting to establish a charitable legacy.

DAFs support a longer-term strategy in a simple way, allowing gifts to grow, tax-free, over time. As National Philanthropic Trust says, “An easy way to think about a donor-advised fund is like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.” Donors receive an immediate tax benefit to the maximum the IRS allows. A good time to consider a donor-advised fund is after a major tax or life-changing event.

Private foundations are legal nonprofits and incur expenses to establish and maintain—as well as require that a percentage of assets be granted each year. Yet while foundations must file tax returns, donors receive income tax deductions for assets contributed to the foundation. Donating through a foundation makes sense when: a family wants to personally deliver checks to the charities they support, it wants to run the foundation and have full legal control and responsibility, it wants to have family members receive compensation for services provided, or it opts to have the foundation support scholarships—and/or make loans to charities instead of grants.

Sometimes, it makes sense to convert an existing foundation to a donor-advised fund vehicle. As shown in the following table, the costs savings and ease of administration for a donor-advised fund can be considerable.

Donor-advised funds versus private foundations

Feature Donor-advised fund Private foundation
Start-up costs None Typically $4K-$12K
Admin/reporting None for individuals Annual state and federal information tax returns
Taxes on investment income None Typically 2 percent of annual net investment income
Privacy Yes Publicly disclosed financials
Annual distribution requirements None for individuals 5 percent required annually
Grants to individuals Not permitted Permitted
Tax deduction limits 50 percent of AGI for cash
30 percent of AGI for securities
30 percent of AGI for cash
20 percent of AGI for securities

Split-interest gifts

Split-interest gifts are a good option for donors seeking to generate income from their charitable gift and/or who are firmly committed to supporting a specific charity over the long term. Forms of split-interest gifts include charitable trusts, pooled income funds and charitable gift annuities.

Charitable trusts are established to provide an income stream to an individual or other beneficiary, with a designated charitable organization receiving the balance of the trust when it terminates. These can be either lead trusts, where the charity is paid first and the remainder goes to beneficiaries; or remainder trusts, where the beneficiaries are paid first and the remainder goes to the charity.

Charitable gift annuities and pooled income funds similarly benefit both the donor and the charity. Pooled income funds are mutual funds created from pooled donations, and are not subject to capital gains taxes—and provide dividends from the investment to both the donor and the charity. Charitable gift annuities are an agreement between a donor and a charity whereby the donor gives a gift to the charity of his/her choosing and receives the immediate tax break, then receives lifetime income from the charity.

What makes sense for you?

Thinking of establishing or adjusting your charitable giving strategy? Contact us today to start the conversation about where, when and how to give using the strategy that works best for you and your family.



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