“What we need to do is always lean into the future. When the world changes around you and when it changes against you—what used to be a tail wind is now a head wind—you have to lean into that and figure out what to do because complaining isn’t a strategy. ”
Smart ways to give to charity
Pondering a large donation to your favorite cause? Better also think about how to make it.
The best way to give money to charity isn’t always to simply write a check. Depending on your circumstances, better options might include complex trusts and foundations. And keep in mind that your best bet might be to use multiple methods in concert.
One alternative is a donor-advised fund. Around since the Great Depression, DAFs have grown increasingly popular recently, helped along by the decisions of financial giants like Charles Schwab, Vanguard and Fidelity to sponsor them.
These funds offer a relatively simple and tax-friendly way to make large contributions. You receive an up-front tax deduction (within IRS limits) on the entire gift, which can be particularly appealing if you expect your tax bracket to fall in the future. Additionally, you can contribute appreciated property and eliminate capital-gains taxes, an increasingly relevant benefit after five years of stock market growth. You relinquish ownership but retain the ability to recommend where the charitable distributions go—and when. Unlike with private foundations, annual minimum distributions generally aren’t required for individual accounts as long as the supporting organization distributes at least 5 percent for all accounts combined.
Taxes remain an important consideration. Generally, the total deduction for all charitable contributions in a year can’t exceed 50 percent of adjusted gross income. For cash contributions to public charities (including donor-advised funds) and some private foundations, this is the only percentage limit that applies. For other private foundations, the limit is 30 percent; for capital-gains property, it’s 30 and 20 percent, respectively. You can carry excess contributions forward for five years. Tax laws are complex—more so since Congress reinstated limits on itemized deductions last year—and exceptions apply to the above. Consult your tax professional.
Of course, taxes aren’t everything. A tax break is an added benefit to making a charitable gift that you wanted to make anyway, not a reason in itself. Spreading donations out can preserve liquidity and your own investment opportunity. You’ll want to work through the entire analysis with your financial advisor.
With interest rates still low, a charitable lead trust offers a potentially appealing, though legally complex, estate-planning tool. Under a CLT, the designated charity receives annual contributions for a period of time, after which the remainder can go to your heirs. Other things being equal, a lower applied interest rate (as set by the IRS) raises the tax value of the charitable income stream. That, in turn, reduces the size of the taxable gift to the heirs. If the trust is established at death, the same principle applies, potentially reducing estate taxes. Income-tax deductions may also be available.
A charitable remainder trust works in the opposite way and has its own potential virtues, particularly for someone holding a highly appreciated asset—say, a concentrated stock position. The trust can sell and diversify with no capital-gains taxes.
Do you want to make charitable giving an ongoing part of your life? If so, a private foundation may be worth considering. The entry point may not be as large as you think. “You don’t have to be Bill Gates to make a difference,” says Henry Berman, CEO of Exponent Philanthropy, an association whose 3,000 members have assets ranging from less than $1 million to $50 million. There are certainly simpler and less expensive ways to donate, but foundations offer the opportunity for maximum control and involvement. Another plus, assuming you don’t prefer anonymity, is that they give you a public presence.
If you decide a foundation is for you, “make sure you surround yourself with devoted, honest people,” says Dr. William Petit, Jr., CEO of the Petit Family Foundation in Connecticut. (Petit is a relative of mine and I contribute time and money to his foundation.) “You will need accounting and other financial advice, some expertise in your mission area and folks who are willing to disagree with you.”
Charitable giving can provide both emotional and tangible rewards. Proper planning can help maximize the latter.
Paul Palazzo, a Certified Financial Planner, is managing director at New York-based Altfest Personal Wealth Management.