Supporting a charitable organization can be a rewarding experience in more ways than one: Not only does it offer the sense of personal satisfaction that comes with helping others, it may also offer tax advantages for you and your heirs.
Charitable giving strategies can range from simple, outright gifts to complex multi-generational trusts and other arrangements. Whatever your goals, it’s important to be thoughtful and intentional when planning your gifting strategy.
Plan to make an impact
People tend to approach charitable giving as a quick exercise they think about once a year. But it really requires planning, especially if you’re making larger charitable gifts, to identify what your philanthropic goals are and what you want to accomplish. It’s important for people who make sizable gifts to have certain outcomes in mind, whether it’s something that endeavors to change the world, like eradicating a disease, or accomplishing a more modest goal in your community. If you have a goal or outcome in mind, it can be easier to develop a giving strategy that works for everyone—the charity, the donor and the heirs.
This approach has been observed from large benefactors like Warren Buffett and Bill Gates and others who are following in their footsteps, asking charities to spend the money within a certain period of time, donating to organizations with strong leadership and a proven track record of delivering results. People are starting to ask themselves: What am I trying to accomplish and what is my timeline? There’s no right or wrong answer here.
Plenty of family foundations are designed to continue in perpetuity, making valuable contributions to society and doing a lot of good in the world. Others have a stronger sense of urgency and want to see more immediate results. These are just two different schools of thought. Supporting charity is admirable regardless of the path you choose.
Start with an outcome in mind
Thinking ahead about a desired outcome gives donors confidence that their contributions are making a real difference in the world. Understanding what you’re trying to accomplish also helps answer important questions about how much to give, which charities you want to support and what assets you’ll donate. Charitable giving becomes part of your broader financial planning process.
You want to make sure you’re donating to the right charity, the right amount and the right types of assets: Giving away cash might reduce income taxes but also affect your liquidity. If you give away a significant portion of the appreciated securities in your investment portfolio you are likely going to want to rebalance your portfolio to be sure you are still on track to meet your growth and income objectives.
Communicate ideas and expectations
When giving away personal items like artwork or collections, it’s a good idea to review the organization’s mission and what it intends to do with the item when they receive it. If you are expecting your local museum to permanently display a painting that has been in your family for decades and they don’t, that’s going to be a big disappointment.
Families often have emotional attachments to items – they are part of the family’s heritage, reflecting their personal values and sense of identity. In these cases, look to open lines of communication with the institution as early as possible.
Really what it comes down to is making sure you and the organization have the same expectations. For example, if you are donating to a university, it may be possible to earmark certain funds for a specific type of activity or a certain department, but only if the contribution is sizeable and the terms of the donation are clearly agreed upon in advance. Every situation is unique, but some universities may look for donations of $1 million or more before they direct funds to a specific program. At Fiduciary Trust, we help our clients understand what their gift means to an organization and how it may be used.
Understand the tax advantages
You can always make an outright gift of cash or highly appreciated securities to a charity, but there are a number of tax-advantaged giving vehicles that may be more effective for you, your heirs and the charity itself. This is where charitable planning can really make a difference.
For example, you might consider a donor advised fund, charitable trust or a family foundation, depending on how much control you want over your donations and how much time and effort you are willing to commit. Donor advised funds can be relatively simple and inexpensive, but the influence you have over choosing grant recipients may be limited, while a private foundation typically carries higher administrative costs but gives your family more control of the grantmaking process.
And you don’t have to make these decisions immediately. Individuals and families who started making outright charitable contributions once a year can gradually work these vehicles into their long-term financial plans.
In summary, it’s critical to think through how to best accomplish your charitable goals: what asset, what structure and what purpose would lead to your optimal result.
This material should not be construed in any way as investment, tax, estate, accounting, legal or regulatory advice. Any description of tax consequences set forth above is not intended as a substitute for careful tax planning.
Charles R. Johnson, Wealth Director, Fiduciary Trust International is responsible for developing investment and trust relationships with families and organizations. He works closely with the Trust and Tax planning group to help clients determine optimal asset allocation and transfer strategies.