Building your philanthropic legacy

Providing financial resources to charitable organizations is a great way to support the causes you care about and make a meaningful impact in your community. It can also help create a lasting legacy for you and your family. A carefully planned charitable giving strategy allows you to achieve your philanthropic goals in the most tax-efficient way possible. By reducing the tax friction, donors are able to maximize how much they can afford to give and in turn how much the charity ultimately receives.

What to consider when developing a charitable giving strategy

As with any plan, understanding your goals is critical to developing the best strategy for achieving them.

Start by identifying the causes or organizations that you want to support. These can be broad or very specific. For example, you may want to give to a religious organization that provides a wide range of services. Or you may decide to give to an organization with a narrow focus like providing specific educational programs to underserved communities. Consider the type of impact you wish to make as well. You may want to prioritize local projects that directly affect your community or contribute to larger initiatives through national organizations.

You should also consider whether you intend to make one-time gifts or establish a program of regular giving, either during your lifetime or including future generations of your family.

Before finalizing your decision, consider researching the organizations you have identified to understand how efficiently and effectively your donation might be used. Transparent organizations may be more likely to use the funds you provide as intended.

Tax-efficient strategies for charitable giving

While the purpose of your gifts is to provide support, it makes sense to do it in a way that provides the most benefit to both you and the recipient. Depending on how you structure your gifts, you can reduce taxes by maximizing income tax deductions, eliminating capital gains, and removing assets from your taxable estate.

• Cash gifts offer deductions of up to 60% of your adjusted gross income (AGI) when given to public charities (including donor advised funds), and 30% of AGI when given to private foundations.
• Noncash gifts such as appreciated securities and real estate receive a charitable deduction of up to 30% of AGI when given to public charities, and 20% when given to private foundations.

In addition to the type of gift, consider the different gifting vehicles that are available.

Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs)

These trust structures allow you to split the income from the principal (or corpus) and choose which to donate. Charitable lead trusts provide income to charities and then the remainder is left to your non-charitable beneficiaries such as family members. Charitable remainder trusts allow you or another non-charitable beneficiary to receive an income stream and leave the remainder to a charity. Each provides deductions that can reduce income and estate taxes. Personal circumstances and the nature of the assets used to fund these trusts will determine which option is most effective in achieving your goals.

Donor-advised funds (DAFs)

A DAF is a charitable giving vehicle administered by a public charity. It allows individuals, families, or organizations to make charitable contributions, receive immediate tax benefits, and recommend grants from the fund over time. DAFs are becoming increasingly popular since they provide a tax deduction in the year the gift to the DAF is made, while allowing for flexibility in terms of the timing, size, frequency and who the grant recipient(s) will be. Note, DAFs can only direct grants to qualifying 501(c)(3) charities.

Private foundation

Private foundations serve a similar purpose as a DAF, but there are some key differences. DAFs are normally easier and more cost-effective to implement and manage, but private foundations may provide more investment choice and the ability to administer charitable programs directly rather than being limited to other 501(c)(3) charities. Private foundations require ongoing administrative tasks such as distributing for charitable purposes at least 5% of their value annually. They also must file annual tax returns (Form 990-PF) and ensure compliance with IRS regulations.

Depending on your needs and goals, utilizing a combination of a Donor-Advised Fund (DAF) and a private foundation can be highly beneficial. This dual strategy allows donors to leverage the flexibility and tax advantages of a DAF while maintaining the control and legacy-building opportunities provided by a private foundation. By integrating both, donors can maximize their philanthropic impact, streamline administrative tasks, and tailor their giving to align with their long-term objectives. What’s more, you can also name a DAF or private foundation as the charitable beneficiary of a CLT or CRT. This gives you even more options and greater flexibility.

Gifts of appreciated assets

Appreciated assets like securities, real estate, or business interests make excellent charitable gifts. Donating them directly to charities avoids capital gains taxes, allowing recipients to hold or sell them tax-free. These assets are deductible at fair market value, maximizing the gift's value and minimizing your tax burden. However, appreciated private company stock donated to private foundations is deductible only at your cost basis, not fair market value. Therefore, a donor-advised fund is a better option for private stock, as it allows for deductions at fair market value.

Charity as part of your estate plan

Including charities in an estate plan allows individuals to leave a lasting legacy by designating specific assets or a portion of their estate to charitable organizations. This can be achieved through various methods, such as bequests in a will, establishing charitable trusts in life or at death, or naming charities as beneficiaries of retirement accounts or life insurance policies. Incorporating charitable giving into an estate plan can also provide tax benefits, reducing estate taxes and maximizing the impact of the donation. When heirs inherit assets, they may also assume responsibilities for managing a DAF or a private foundation. This involves overseeing grant distributions, maintaining compliance with regulations, and making strategic decisions to continue growing your philanthropic legacy. Engaging family with philanthropy early can help carry this legacy forward to future generations.

Best practices for charitable giving

Review your charitable goals and strategy periodically so that you can identify the adjustments you need to make so your giving remains aligned with your personal goals and financial situation. Also monitor the organizations you are supporting to ensure that their focus hasn't changed, and they are still doing the work that's important to you.

Ensure that your professional team of advisors in tax law, estate planning and wealth management are aware of your goals and the planning you have done so that they may provide the best possible guidance.

Seek support from a wealth manager

Charitable giving can impact the world in a positive way and shape your family's legacy for generations to come. Developing a thoughtful and tax-efficient strategy can ensure that your gifts reflect your values and achieve maximum impact.

Connect with a Citizens Wealth Manager to develop a tailored charitable giving strategy that aligns with your personal and financial objectives, ensuring sustainable philanthropic success and optimal tax efficiency.