Supporting a cause you believe in can be a hugely rewarding experience, but how you give matters as well. Donors are increasingly using charitable vehicles that allow them to give now, in addition to making bequests.
This trend toward lifetime or “accelerated” giving, as it’s sometimes called, can increase the impact of your gift on the charities and nonprofits you serve—but it also can be beneficial for you and your family.
“Giving with a ‘warm hand’ in life, versus a ‘cold hand’ at one’s passing, has a lot of appeal for many people. Charitable giving is part of a lifelong mission to help others, but it also can be an integral part of your investing plan,” says Robert Aruldoss, senior financial planning research analyst at the Schwab Center for Financial Research.
Be a smarter giver
Donating to a charitable giving vehicle such as a donor-advised fund, private foundation, charitable remainder trust, or pooled income fund offers several obvious benefits. The donations are tax deductible; they can grow tax-free; you can donate appreciated assets and avoid capital gains tax; and donations are free of gift and estate taxes. Even better for the causes you care about: You can potentially leave a larger gift than you could if you donated cash, because assets can still have the potential to grow within the giving vehicles.
Think about your charitable goals and objectives and decide which vehicle suits you and your goals best, Robert says. As you review the options below, ask yourself the following:
- Would you be satisfied by simply donating assets—or would you prefer to receive some income from those donated assets as well?
- Do you want a high level of control over how your assets are managed and distributed, or are you willing to cede some oversight in favor of a more streamlined process?
With those factors in mind, here is an overview of four charitable vehicles that may work for you. The first two can be good choices if your aim is solely to give; the second two let you give and draw an income stream from your donated funds. But with all four charitable vehicles, contributions are irrevocable—similar to writing a check.
Balance tax planning and giving
With a donor-advised fund (DAF), you can contribute assets to a larger fund or pool of money that can then be passed on to different charities. And while you don’t have complete control over how your money gets invested while it’s in the fund, you can pick the charities that will benefit from your gift (“as long as they are 501(c)(3) organizations,” Robert notes).
DAFs have low costs and require no record-keeping on your part, because typically they’re managed by brokerage firms, mutual fund companies and community foundations. These charge an annual fee for account maintenance, compliance requirements, and so forth.
This sort of vehicle might suit you if your yearly income is higher than normal and you'd like to donate to a charity, but haven't decided which one. With a DAF, you get the tax deduction the year you make the contribution, but you can take your time designating gifts to charities and spread out your giving over many years. DAFs have other advantages as well:
- You can make gifts anonymously.
- You can name your part of the fund (for example, “The Smith Family Charitable Fund”).
- Your children can become successor advisors and continue your gift giving after you die
Some donor-advised funds don’t permit grants to charities outside the U.S., so if your charitable aim is in another country, you may be better served by a different vehicle.
Extend your legacy
A private foundation offers you the most control over your philanthropy and legacy—but it’s also one of the more complicated and expensive charitable-giving vehicles.
When creating a private foundation, you usually work with an accountant and lawyer to establish a tax-exempt, nonprofit entity that you and your officers fund in order to make grants to charitable organizations of your choice. Private foundations aren’t created with commingled funds but with the funds of an individual or a family group.
Comparing a foundation with a donor-advised fund, you have more flexibility in a few key areas. A private foundation allows you to make grants to individuals, for example, as well as gifts to charitable organizations. And while a DAF permits family members to take an advisory role, a private foundation allows you to hire relatives to help run the foundation.
But these perks come at a price. First, there are greater restrictions on the deductibility of your donations, compared to a DAF (where more lenient restrictions apply). In addition, a foundation must pay out 5% of the income from its investments every year, less any tax it pays on that income—as well as a 1%–2% excise tax on its net income.1
Boost your retirement and your donation
If you’d like to make a meaningful contribution to charity while adding another source of retirement income, consider a charitable remainder trust (CRT).
There are various types of CRTs, but all these vehicles offer the possibility of making a currently deductible charitable gift—and creating a stream of income that goes to you—while assets that will ultimately go to charity grow within the trust.
That said, the rules governing these trusts are complex, and thus they tend to be time-consuming and expensive to set up. You need an attorney to draft the trust document, and there are annual reporting and compliance requirements. Restrictions aside, here’s how they work:
Basically, you set up the trust so that you or another income beneficiary gets a set amount of income for a certain period of time. The income from the trust is taxable, but you can defer it until you need it, such as in retirement when your tax bracket may be lower. These parameters are capped based on a minimum amount that must be left to the remainder trust beneficiary, which is typically one or more charities of your choice.
If you want more flexibility, or wish to create a vehicle that can provide income as well as offering a way for your heirs to continue giving, you can name a donor-advised fund as the charitable beneficiary, which gives your children the opportunity to direct gifts to multiple charities after your death.
A low-impact way to give (and gain income)
A pooled income fund (PIF) is similar in spirit to a charitable remainder trust, but with less cost and hassle—but you get less flexibility and control.
You don’t have to involve a team of accountants and lawyers to set up a trust as you do with a CRT. Instead, you give to the charity of your choice through its pooled income fund (assuming it has one), or through a bank or trust that disburses the money. The organization takes care of the management, taxes and record-keeping—and charges an annual fee to do so—while providing you with a predictable income stream. As with a CRT, you receive a current deduction, the future income is taxable, and your assets grow in the fund over time, providing the charity with a potentially larger gift in the end.
You can also continue to make donations to increase the income stream, which will increase the principal that will ultimately go to the charity.
The choice is yours
While writing checks to important causes is the most direct option, choosing to give via a charitable vehicle can be the right choice if you want your giving to have lasting impact as well as certain personal benefits. If you’re looking for the ongoing income that a charitable remainder trust or a pooled income fund can provide—or if you’re thinking about using a donor-advised fund or private foundation to enhance your legacy—a charitable vehicle can offer myriad benefits for you, your heirs and the causes you care about.
1 Source: IRS Exempt Organizations Tax Manual 22.214.171.124 (04-01-1999) Statute.