For the typical individual, giving to charity begins and ends with annual donations. A year-end trip to the check-writing desk or a series of monthly checks is manageable. Yet most people also arrive at a point where they begin to wonder if there is something they can do to ensure that their impact extends far beyond their own lifetime.
Philanthropic strategy suggests some tools that give additional impact to charitable giving while providing outsized benefits to the giver. Compared to simple donating, these tools require a bit more planning – but deliver outcomes that make the effort worthwhile.
Grow Your Wealth as You Give It Away: Donor-Advised Funds
Donor-advised funds are a popular route for those who want flexibility in their giving. Donor-advised funds work a bit like an investment account for charitable giving. A donor contributes money or property, receives an immediate tax advantage for the contribution, and issues grants to eligible charities over time.
The advantages of a donor-advised fund come from the way the funds can be invested. While waiting to make donations, people often fall prey to the urge to send money to every appealing fund-raising letter that comes in the mail. A donor-advised fund avoids that temptation. The money is invested. What could have been a $10,000 donation that quickly gets spent is transformed into a $15,000 or more in-value fund, with many thousands of dollars of the value available to give away over time.
Donor advised funds with low minimums are available from many community foundations, so this strategy is not only for the extremely wealthy. The administrative burden is also kept to a minimum because the organization that provides the fund does all the compliance work.
The Forever Fund: Endowment Strategies
For donors thinking about generational impact, endowment funds offer a way to create perpetual giving streams. Unlike regular donations that get spent immediately, endowments preserve the principal amount while using investment earnings for charitable purposes.
The math is simple. An endowment for $50,000 that earns 5% can distribute $2,500 a year forever, as long as the investments keep pace with inflation. In 20 years, the endowment will have distributed $50,000 and will still retain the original amount. In 40 years, it will have twice the original amount while still distributing the same annual amount.
This service is offered by community foundations through endowment funds that allow less wealthy donors to group their resources together. This lowers the fees each donor faces. It also improves the rates on funds being used for endowing returns. The governance provided by foundations also ensures that any distributed funds are used according to the goals of the donor and not misspent at the time of distribution.
Tax-Savvy Giving with Appreciated Assets
Most people think of cash when they think of tax-deductible contributions. Yet there are several ways to donate appreciated assets to charities for even better results. Donating stock, real estate or other business assets that have increased in value lets donors take advantage of tax rules in ways that wipe out capital gains taxes.
This method works especially well for high-income individuals. For someone with a 37% income tax rate and a 20% capital gains tax rate, a stock with a current value of $100,000 can be donated at a net gift-tax cost of just over $43,000. The receiving charity receives the full gift value, making everyone happy aside from the IRS.
This option requires a lot more planning than writing a few checks. However, the tax savings should be worth it even for tax advisors and financial advisors who can advise on the rules.
Charitable Remainder Trusts: Have Your Cake and Eat It Too
Charitable remainder trusts have a complicated name, but they solve a problem many people face when they want to donate valuable assets but also have a continuing need for income. Charitable remainder trusts allow donors to give away assets while retaining an income stream for their lifetime or for a set term.
After transferring ownership of an appreciated asset to a charitable remainder trust, the donor receives a current tax deduction. They also receive an annual payment stream based on the value of the donated asset. After the term the trust is empty but the receiving charities will receive what is left of the donated assets. This option is especially useful for people who have more complicated estate goals but want to assure themselves of a source of income for life.
People have to spend some money to establish Charitable Remainder Trusts, so they should be considered for gifts of $250,000 or higher. However, once that threshold is met, they provide amazing results for donors in terms of taxes owed and benefits granted.
Getting Started with Strategic Giving
Advanced strategies fit well into the larger context of financial or estate planning. People interested in advanced giving should start with a clear understanding of their goals and timeline. Then they can explore programs available for advanced giving strategies.
Community foundations provide advanced and complicated giving strategies under one roof. They also have experience with their communities and can guide donors through the needs and details of their local charities. Their staff can also help prevent errors during the technical processes required while keeping the focus on results for donations.
The most important point is that you do not need to be fabulously wealthy to use strategic giving tools. However, you do need to plan for them. You also need to let them grow to realize their full power. Even modest amounts of money can be plenty if used properly. Most “advanced” giving strategies probably do not deserve their intimidating name: if someone is thinking of giving away money, they should consider the funds an investment portfolio that needs oversight and management.
The thought of writing checks every year may be less enticing than using new techniques for “advanced” donating; but people willing to explore some new tools may well receive outcomes that are much better for all parties involved.
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Richard