Investing for a Higher Purpose:

Making The Most Of Charitable Contributions

BY AARON D. SHERMAN, CFP®, and S. DREW KAVANAUGH II, MBA, CFP® Odyssey Group Wealth Advisors

Philanthropy is a form of investing, but instead of capturing the returns for yourself, you’re investing money for a higher purpose. It’s not just a matter of giving money away, but rather investing it into a cause or an organization that is going to have the greatest impact. While charitable giving can be rewarding, navigating the process can be bewildering.

With the right strategy, charitable giving can be done in a tax-efficient manner that maximizes the impact of your dollars while minimizing your tax liability. We’ll explore how to make the most of the tax benefits available as you support the causes that you care about.

To dispel a commonly heard myth, tax benefits only partially offset the cost of charitable giving. There’s no magical financial maneuver that allows charitable contributions to result in a net positive financial benefit to you. So, don’t let tax benefits be the foundational reason for your giving. Rather, let your desire to do good take the lead, then make sure that your giving is supported by a beneficial tax strategy.

GIVING DURING YOUR LIFE –4 SIMPLE METHODS

There are a few simple ways you can make donations during your life that can benefit organizations you care about while reducing your tax liability.

Cash

Giving cash is the simplest and most common way of supporting charities. By “cash,” we mean physical cash, checks, credit cards, and other direct money transfers. The benefit of giving cash is the simplicity, particularly for smaller gifts. It is important, however, to keep a record of these gifts for tax purposes, as it’s the responsibility of the individual taxpayer to track and report donations.

Depending on your tax situation, you may not see any tax benefit from outright gifts of cash. Charitable deductions are only available as an itemized deduction, so if you don’t itemize your deductions and only make small cash gifts, it’s unlikely that you’ll see a tax benefit.

DONOR-ADVISED FUNDS

For those who don’t typically itemize their deductions but do give a fair amount to charities and want to take advantage of the associated tax breaks, donor-advised funds can offer a good solution. Donor-advised funds have taken off in popularity since the standard deduction was doubled at the end of 2017, which meant that fewer people see the benefit of itemizing their deductions. Donor-advised funds enable you to make large contributions that are immediately tax-deductible and can be used to fund giving in future years.

Appreciated Assets

Whether you’re giving directly or via a donor-advised fund, you may be able to reap even more tax benefits from your donations by gifting appreciated assets, which enables you to avoid paying capital gains tax. Adding that tax break to the itemized deduction that you would also have can create significant tax savings. The maximum amount that you can deduct for gifts of appreciated assets is limited to 30 percent of adjusted gross income, whereas you can deduct up to 60 percent of income for cash gifts.

QUALIFIED CHARITABLE DISTRIBUTIONS (QCDs)

For those over the age of 70½, QCDs can be a great strategy for giving and have also become increasingly popular since the standard deduction was doubled in 2017.

Although withdrawals from IRAs are fully taxable, QCDs allow you to make donations directly from your IRA to a qualified charity without those amounts being counted as taxable income. This means you can see a tax benefit without needing to itemize your deductions. And if you’re 73 or older, QCDs can also be counted toward your annual required minimum distribution.

Planned Giving

For those who prefer to leave funds to charity upon death as part of their estate plan (often referred to as planned giving), this can be accomplished simply through your will or beneficiary designations. Planned giving can allow you to make significantly larger gifts at death than you otherwise would be able to afford during life. Such gifts are not tax deductible during your life, except for some trust strategies that we’ll cover later.

Bequests Via Will

Bequests made in your will offer flexibility in terms of the source of funds used, the order of priority, and distributing either a specific dollar amount or a percentage of your assets. These assets do go through probate, however, so there may be some additional costs and delay in reaching your charitable goals. There are also certain tax benefits that can be more easily attained by direct beneficiary designations.

Bequests Via Beneficiary Designations

Bequests made via beneficiary designations enable your donations to bypass the probate process and go directly to the charities you choose. From a tax perspective, it can be particularly valuable to designate charities as beneficiaries of your IRA or other tax-deferred accounts — charities would not pay tax on those assets, whereas individuals would. Because account values fluctuate with markets, and accounts are typically allocated to beneficiaries in percentage terms, it can be difficult to specify exact dollar amounts with beneficiary bequests.

MORE COMPLEX GIVING STRATEGIES: TRUSTS AND FOUNDATIONS

For larger gifts that also incorporate elements of estate planning, charitable trusts and foundations are useful tools. However, because of their complexity and legal and administrative costs, their use should be targeted to specific situations, typically involving very large gifts.

Trusts

As with other trusts, charitable trusts are legal arrangements that enable assets to be distributed to your desired beneficiaries under specific terms. They can be useful in some cases to guard inheritances for younger beneficiaries, protect assets from creditors and other parties, minimize taxes, and allow a degree of control over the assets after death. What distinguishes charitable trusts is that a charity benefits from the trust either during or after your life. Charitable remainder trusts and charitable lead trusts are two commonly used types of charitable trusts. Both types of charitable trusts can be complex to set up and usually require ongoing legal and administrative support.

Private Foundations

A private foundation can also be part of a strong charitable strategy. A foundation is an actual qualified charity established by an individual, family, or corporation. It offers donors a great deal of flexibility and control over their gifts, but because of the costs associated with regulatory compliance, they are usually more appropriate if funded with at least $1 million. And since much of this work can be accomplished with donor-advised funds, foundations are generally better suited for those who wish to fund direct charitable work, rather than to fund other charities.

Both trusts and foundations are complex and costly to implement, but in the right situations, they can be powerful tools to increase your charitable impact and help with the execution of your estate plan.

Professional Guidance

Charitable giving is a powerful way to invest for the benefit of others. A comprehensive strategy should be discussed with your financial advisor, accountant, and possibly your estate attorney to ensure that your giving is tax-efficient and impactful.