Among the greatest rewards of professional success is having the resources to make a financial impact on the organizations and causes that you hold dear. However, you may face a three-pronged challenge in balancing your retirement income needs, charitable intent and successors’ benefits.
Fortunately, there are multiple giving strategies that enable donors to achieve that balance, assert more control over how charitable funds are spent and mitigate the unexpected costs of donations. Consider a pair of advantageous giving vehicles: donor-advised funds and charitable trusts.
High-net-worth business owners or those with generational wealth may consider starting a private foundation to direct charitable endeavors, but a donor-advised fund is a similar strategy that requires less time, money, legal assistance and administration to establish and maintain. Essentially, a donor-advised fund is an agreement between a donor and a separate host organization(s) to create an account in the organization’s fund. Contributions are legally controlled by the organization and irrevocable, but the donor (or a donor’s designee) retains advisory privileges as to how much, when and to which charities grants should be made. The fund determines how the money is spent, but in most cases, the donor’s wishes are carried forth.
Perhaps the most appealing aspect of a donor-advised fund is the tax advantage. Generally, donors can take immediate federal income tax deductions of up to 60 percent of their adjusted gross income (AGI) for cash contributions and up to 30 percent for a long-term capital gain property, such as appreciated stock. If a business-owning donor’s company is having a particularly good year or if they are planning to sell that year, contributing some of the extra funds to the donor-advised fund can prevent a major impact from capital gains tax. Additionally, there are no gift tax consequences, and donated funds are removed from the donor’s taxable estate.
Setting up charitable trusts is a more flexible strategy that can enable donors to provide tax-advantaged assets to a charitable organization and establish an income stream for noncharitable beneficiaries, such as a child or other heir, all from a single “split-interest” trust.
Depending on how the trust is organized, the income stream may first go to the noncharitable beneficiary, with the remaining assets going to the charity upon the donor’s death or after a specified period (charitable remainder trust). Alternatively, the order of who receives the gift first can go the other direction (charitable lead trust).
There also are federal income, gift and estate tax benefits that come with charitable trusts, but the relief may not be quite as significant as it is with a donor-advised fund. Additionally, the process to begin a charitable trust is more complicated and may require an attorney’s assistance. Even with those potential complications, some investors may appreciate the comfort of having a more direct say in how and where their funds are directed.
Charitable giving is a worthy endeavor, and while it is regarded as a selfless act, it is reasonable to give in a way that protects personal wealth. After all, by taking the proper steps to reduce tax loss, there is more to donate and provide to heirs. To learn more about these strategies and others that preserve an estate — for charities and successors alike — reach out to a wealth manager to ensure a successful outcome.
