The answer will depend on each donor’s personal circumstances and desires, but the bottom line is that there is no wrong way to give!
In this paper we will provide an overview of the most common giving options along with some guidance on when each option might make sense.
The simplest option is to give a cash donation to your charity of choice. Most charities can accept payment via check or credit card, and many now offer electronic payment services such as PayPal or Venmo as well. Cash donations can be made to public charities, private foundations or individuals.
Cash donations are ideal for those looking for simple ways to give and for those who may not yet have highly appreciated assets to gift.
Highly Appreciated Assets
Another option is to donate highly appreciated assets. This method allows the donor to transfer an asset, such as stock, to a charity without the need to sell it first. The primary benefit to this giving method is the avoidance of any capital gains tax on the gifted asset since the donor will not need to sell the asset before donating it.
Donating highly appreciated assets is a common strategy for charitably inclined individuals who have significant gains. These donations can be made to public charities, private foundations or individuals.
Donor Advised Funds
A Donor Advised Fund (DAF) is a charitable giving vehicle that provide donors with an immediate tax deduction, then allows them to recommend gifts to charities over time.
DAFs can accept contributions of cash or securities. Whereas charities typically only accept donations of liquid assets, DAFs may be able to accept illiquid assets as well. They are fairly easy to administer and generally have nominal fees involved. Above a certain funding level, a DAF may also be managed by an investment advisor.
This option can be ideal for individuals looking to receive a larger tax deduction in one year due to a wealth creation event such as the sale of a business or real estate. DAFs can also be used as a legacy giving tool for families who want to build a culture of giving.
DAFs may only be used to make donations to public charities or private operating foundations. They cannot make grants to private non-operating foundations or to individuals.
A Private Foundation is a non-profit organization set up by an individual or a business for the purpose of charitable giving. They are typically funded with one large donation that is invested with income being distributed to a charity (or multiple charities) each year. Private Foundations are required to distribute a minimum of 5% of the prior year’s average net assets for charitable purposes each year in order to maintain their tax advantaged status.
Private Foundations are typically funded by an individual, family or business and can therefore be powerful legacy tools. They may be “operating” or “non-operating.” A private operating foundation is one that uses the majority of its resources for the active management of its own charitable programs or services, while a private non-operating foundation grants funds to other charitable organizations. Perhaps one of the most well-known Private Foundations is the Bill & Melinda Gates Foundation, which is an operating foundation.
These entities are more administratively onerous than other charitable vehicles but may still be beneficial, particularly for very high net worth families who are interested in creating a culture of giving within the family. Private Foundations, while income tax-exempt, are typically subject to a nominal investment income tax.
Private Foundations can grant donations to any public charity and sometimes to a non-charity if the funds will be used for charitable purposes (although this option requires careful vetting to avoid a tax penalty from the IRS). In addition, Private Foundations may hire staff, reimburse expenses and provide donations directly to individuals in the form of scholarships or hardship assistance.
Qualified Charitable Distributions from an IRA
Individuals who are over the age of 70 ½ have an additional opportunity to make gifts directly to charity from an IRA. These are called Qualified Charitable Distributions (QCDs) and are allowed in any amount up to $100,000 per person, per year. QCDs may be used to satisfy all or part of an individual’s Required Minimum Distribution per year without resulting in any tax implication. For more information on this strategy, please see our whitepaper specific to this subject.
Charitable donations may offer a tax deduction for those who itemize. The available deductions depend on the type of asset that is gifted and are subject to AGI limitations. Donations that exceed the tax deduction limit in a given year may be carried forward for up to five years. It is important to consult with a tax professional to fully understand the implications of various giving options before taking action.
Charitable giving, while simple in concept, can be somewhat complex depending on the individual’s financial situation and goals. Your Freestone Client Advisor can work with you to create a philanthropic planning strategy that will complement your overall financial plan to pursue your goals in the most efficient and tax-effective manner possible.