Giving to Charity: 4 Smart Strategies

November 7, 2012

Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research

For some, charitable giving goes beyond donating old clothes or writing the occasional check to support a favorite cause. It's a mission to be accomplished over a lifetime (or longer), and an integral part of one's investing plan.

A charitable remainder trust, pooled income fund, private foundation, or donor-advised fund can offer a tax-smart way to further your personal philanthropy. Charitable remainder trusts and pooled income funds provide you with income even as you give to charity; private foundations allow you maximum control over your giving (although the costs of establishing and maintaining a foundation can be relatively high); and donor-advised funds let you make one tax-deductible contribution up front and then grant to individual charities on your own schedule.

Charitable remainder trust

A charitable remainder trust is a private fund that you set up and contribute to. It provides you or the beneficiaries you select with taxable income for a certain number of years, or for life. Money that's left over—the "remainder"—passes tax free to one or more charities of your choosing.

Some features of a charitable remainder trust:

• You control the trust (or you can designate a trustee).
• Your contributions are tax deductible, based on the amount of money projected to go to charity.
• You can contribute cash, investments and property.
• It often makes the most sense to contribute appreciated stocks, bonds and mutual funds, particularly if you want to diversify an over-concentrated position and avoid current income tax.
• The income you receive is fixed or recalculated each year, depending on the type of charitable remainder trust you set up. Either way, your annual income from the trust is capped, based on a minimum amount that must ultimately go to charity.

Setting up and maintaining a charitable remainder trust takes some work. You need an attorney to draft the trust document, and you should consult a tax professional for the proper tax treatment, as well as for yearly reporting and compliance.

Pooled income fund

Some public charities allow you to contribute to a pooled income fund, which works much like a charitable remainder trust except the charity takes on the administrative chores for an annual fee.

• The charity pools contributions from different people, invests the proceeds and makes annual, taxable payments to you and other donors for life based on your contributions (and certain actuarial factors).
• Contributions are typically tax deductible, based on the money projected to pass on to the charity.
• As with a charitable remainder trust, it often makes the most sense to contribute appreciated stocks, bonds and mutual funds.
• When a participant dies, the remainder interest goes to the charity.

Private foundation

A private foundation is a tax-exempt charitable organization (net investment income may be taxed at 2%) that's set up and funded by a single person, or a group of individuals or businesses.

• Within limits, you can deduct contributions to a private foundation on your federal tax return (state rules may vary).
• In most instances, the foundation must distribute 5% of its value to charity each year, minus any tax it pays on investment income.

Private foundations involve set-up costs, ongoing compliance, rules against self-dealing and so on. If your net worth is very high, you have highly appreciated stocks, bonds or mutual funds, and you want maximum control over your charitable endeavors—including having your name live forever in philanthropic history—a private foundation may be just the thing.

Donor-advised fund

A donor-advised fund, such as the Schwab Charitable Fund™, is a pool of money managed by a charitable organization on behalf of many donors.

However, you direct your piece of the fund, including how the money is invested and which charities will get distributions from your part of the fund. And, you can name your donor-advised fund whatever you want (e.g., "The Smith Family Charitable Fund"). You receive a tax deduction in the year you contribute to your donor-advised fund, and the organization handles the set-up and compliance for an annual administrative fee.

These, then, are four accounts that can help you make the most of your charitable giving. Don't forget to talk to a tax professional about your particular situation.