Ask an Expert: Survey of Charitable Gifting Strategies
A survey of the more common charitable gifting strategies include:
Direct and immediate gifts
The most typical gifting scenario is to provide an outright gift directly to a 501(c)(3) or qualified charity. To qualify as a tax deduction for the donor the gift of property or cash must be irrevocably made before the end of the tax year. When using this strategy the donor should consider donating substantially appreciated property for further tax benefits.
A more sophisticated strategy, with additional tax benefits and considerations involved, is the use of a charitable trust. The two most utilized charitable trusts are the charitable lead trust and the charitable remainder trust.
The charitable lead trust provides the charity with an income for a specified period of years, followed by the payment of principal to a donor’s heirs. The charitable lead trust is aptly named as the charity is paid first.
The charitable remainder trust provides an income to a donor’s heirs for a specified number of years or for the lifetime of the donor’s heirs, followed by the payment of principal to a designated charity. Hence the word remainder in charitable remainder trust.
Other charitable trusts beyond the scope of a survey include, but are not limited to, charitable remainder annuity trusts (not to be confused with an annuity insurance product, which we do not recommend), charitable remainder unitrusts, net income charitable remainder unitrust, net income with makeup charitable remainder unitrust, and a flip-charitable remainder unitrust.
Other charitable trusts beyond the scope of a survey include, but are not limited to, charitable remainder annuity trusts, charitable remainder unitrusts, net income charitable remainder unitrust, net income with makeup charitable remainder unitrust, and a flip-charitable remainder unitrust.
A wealthy donor with significant charitable intentions may want to consider establishing a private foundation. The foundation receives the assets from the donor and then, usually over several years and possibly decades, the private foundation makes grants to what it deems as worthy charities. The use of a foundation creates multiple opportunities for the donor including tax benefits and, perhaps most importantly, the family can retain control of grant approval.
Community foundations (quasi-public foundations)
Another opportunity for a wealthy donor is a community foundation. The donor selects a community as a beneficiary of the foundation’s assets to be administered over several years or decades. Unlike a private foundation, a community foundation operates in a similar fashion to that of a public foundation in that it is controlled to some extent by a committee of community representatives.
Donor-advised funds (working through public foundations)
A donor-advised fund is set up with a public charity (creating the best possible tax advantage for a donor) for purposes of later distribution to charities. The donor provides an immediate and irrevocable gift to the public charity and receives an immediate tax benefit from the gift. The donor often combines the tax advantages of the donation with the saving of capital gains on highly appreciated assets. The public charity becomes the owner of the funds and directs all distributions of the funds to charity; however, the donor is permitted to advise the public charity as to which charities will receive the funds.
Conclusion and caveat
In deciding upon which charitable strategy to utilize the donor should consult an adviser with extensive education, training and experience in financial, estate and tax matters. The issues to consider are as complex as they are many. When done inexpertly the consequences can be devastating for all involved. When done correctly everyone wins: the donor, his or her family, and the charity.
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Stephen L. Hicks, JD, MS and Roger L. Millbrook, JD, CPA/PFS, are fee-only fiduciary investment advisers and principals of Siena Capital Management, LLC and Siena Accounting Services, Inc. Both hold law degrees as well as other graduate degrees and/or designations in the area of financial services.