Does Your Financial Planning Include Charitable Giving?
America is a nation of givers. In 2005 (the latest data available), more than $260 billion was given to charity and more than 75% of these donations came from individuals.1
Including charitable giving within your financial plan may enable your family to create an income stream, earn tax savings and maintain a significant degree of control over assets during your life and after death. Donor-advised funds, family foundations, gift annuities, charitable remainder trusts and charitable lead trusts are some of the options that may be available to you.
Donor Advised Funds: Convenience and Flexibility
A donor-advised fund, typically
administered by a mutual fund firm, is a public charity under Section
501(c)(3) of the Internal Revenue Code. Contributions are tax
deductible, and you may donate a variety of assets, including mutual
fund shares, stocks, bonds, certificates of deposit and others.
In return for making the contribution,
you may allocate this value of your donated assets among investment
choices made available by the fund firm. Like any long-term
investment, the account has the potential to grow over time,
potentially increasing your giving potential. You may be able to
spread your grant-making over months or even years in accordance with
your personal wishes.
Donor-advised funds offer considerable convenience because the fund firm handles the administration, including making donations available to designated charities. In addition, there often is the option of consolidating giving activities along with other family members through a single account, which means donor-advised funds are family friendly. Children can be named as successors, ensuring the continuation of your family's giving legacy.
Family Foundations: Building a Legacy, Reaping Tax Benefits
Family foundations are another option
for pursuing philanthropic objectives, involving family members in
charitable activities and reaping tax and estate planning
efficiencies. As with a donor-advised fund, members of a single
family typically donate their assets. But a foundation usually
requires a higher level of personal involvement, with donors playing
a significant role in management or governance.
In general, there are two types of
family foundations: private foundations and supporting organizations.
Private foundations, the more prevalent of the two, offer more
flexibility and control. With a private foundation, donors usually
oversee the board of directors and grant-making decisions. In
addition, the Internal Revenue Service requires 5% of a private
foundation's assets to be distributed each year and assesses an
excise tax of between 1% and 2% on investment gains. In contrast, the
board of directors of a supporting organization consists of members
appointed by the charities that are supported. Supporting
organizations are not required to make distributions or to pay taxes.
Gifts made to either type of family foundation generally are tax deductible yet deductions
vary depending on the foundation's structure, the type of property or asset contributed and the donor's income. But as a general rule, all gifts are removed from the donor's estate, avoiding estate and gift taxes.
Trusts: Combining Charity With Financial Planning
When you and your family consider your
approach to charitable giving, estate planning may be an important
concern. A charitable remainder trust (CRT), a charitable lead trust
(CLT) or a gift annuity may help you bring estate-planning issues
into the picture.
A charitable remainder trust allows you
(as the grantor) to receive income and a tax deduction at the same
time and ultimately bequeath your assets to a charity. The trustee
sells donated property or assets, tax free, and establishes an
annuity or floating unitrust amount payable
to you, your spouse or your heirs for a designated period of time.
Upon completion of the time period, the remaining assets go directly
to the charity. Assets that have appreciated in value typically are
used to fund a CRT and the value of
these assets is determined by an appraisal at the time the trust is
With a charitable lead trust, the charity receives income from the trust for a designated period of time, after which the principal goes to the beneficiaries, who receive the assets free of estate taxes. A portion of the value of the assets that are transferred to the trust are subject to gift taxes.
Charitable Gift Annuity
In some respects, a charitable gift
annuity may be more cost effective and more tax effective than a CRT
or CLT. Unlike trusts, annuities have no administrative or setup
fees. You may use virtually any asset to fund a charitable gift
annuity, and your charity of choice guarantees immediate or deferred
payments to you. The typical tax deduction in the year assets are
transferred to a charitable gift annuity is between 30% and 45% of
the fair market value of the donation.
Including charitable giving within your
financial plan can enable your family to create an income stream,
earn tax savings and maintain a significant degree of control over
assets. If you have specific charitable goals, you may want to
present them at your next family gathering.
This article is not intended to provide specific investment or tax advice for any individual. Consult me, your financial advisor, or your tax advisor if you have any questions.
1Source: Giving USA, June 7, 2006.
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