What's the best way to make tax-deductible charitable contributions? Write a check? Set up a foundation? Or something in between? The answer depends on a number of factors, not least the recipients of your philanthropy, what kinds of assets you'd like to donate and the size of your gift. Timing can be critical, too.
Many of my clients have taken advantage of donor-advised funds (DAFs) to simplify their giving and take an immediate tax deduction. DAFs enable donors to set their own pace in determining recipients and distributing funds: There are no IRS requirements for minimum annual distributions. These and other attributes have made DAFs the fastest-growing giving vehicles in the U.S.
DAFs are maintained by many major financial institutions such as Fidelity, Schwab and Vanguard. These entities manage all the work of recordkeeping and tax reporting—for a fee. The contributions within these accounts can be invested to your specifications and grow tax-free.
But DAFs may not be the most effective option for your philanthropic goals.
I have a client, a highly successful attorney, who gives generously to her favorite causes every year. Writing a check and donating stock directly to her favorite causes had long sufficed for her charitable efforts. She also sits on the board of a community-based nonprofit, which is the main focus of her giving. Most years, she's made donations in the form of appreciated securities, thus avoiding paying taxes on long-term capital gains.
In terms of IRS value calculations, directly donating securities is essentially the same as cash. The favored charity must be set up to accept publicly traded or private securities. And donations of securities and other appreciated assets are limited to 30% of adjusted gross income (AGI). Cash donations are limited to 50% of AGI. These same limits apply to DAFs, too.
What changed my advice for this client and brought me to suggest that she switch from direct giving to giving via a DAF? Just this: She had a stellar year in the markets, including a giant long-term capital gain. She needed time to give serious thought to where to focus her giving. The tax year was drawing to a close, and the value donated was significantly more than she typically gives in any given year.
Establishing a DAF was the perfect solution. Moving that appreciated stock into a DAF meant that she could take an immediate tax deduction for its full market value and protect against the tax-dollar hit. And DAFs have no payout requirements in terms of timing or funding, so she could take the time she needed to plan her charitable distributions.
Private Foundations: A Serious—And Public—Commitment
Why not establish a private foundation? For some, maintaining a foundation that publicly promotes their values is a meaningful pursuit in itself. Wealthy families can pass their philanthropic priorities to succeeding generations.
But establishing and maintaining a private foundation is a serious undertaking. Considerations include:
Costs and legal requirements.
You'll need to factor in accounting expenses, including tax filings and administration, as well as compliance regulations, bringing in board members and making required distributions of at least 5% each year.
Establishing a legal entity.
Are you in a hurry to get off the ground for tax purposes?
Public versus private giving.
The tax filings are public, as are the assets owned by the entity.
The Extent of Your Gifting Matters
If you're choosing between establishing a foundation and funding a DAF, a key factor should be how much you intend to give. In advising my clients, I've found that committing assets valued at $5 million and above certainly warrants the kinds of investments in record-keeping, accounting and personal time that private foundations require.
That's because there are costs associated with maintaining DAFs, too. The entities that house DAFs typically charge administrative fees based on assets under management. For DAFs of $500,000 or less, you'll normally be charged about 0.60% in fees. That percentage decreases as the assets invested rise. Still, above about $2 million to $3 million, the argument that DAFs cost less to maintain than private foundations becomes increasingly less convincing.
Both structures enable you and your trusted investment adviser to invest the held assets judiciously—in line with your giving goals and time horizon.
You already know the benefits of direct giving—including writing a check, putting a contribution on your credit card or donating your used car. You can do this even on the last day of the year for tax purposes. Many charities are set up well to receive all manner of charitable gifts. And you don't need a formal foundation to engage family members in making giving decisions.
For many, writing a check is still the easiest and lowest-cost option. But don't forget: You're required to do the recordkeeping.
Give Your Way
For each of us, charitable giving carries unique meanings and aspirations. If your preference is to keep your giving as non-public as possible, DAFs are great. All donations are made through the financial entity that holds the DAF; you can choose whether to be acknowledged or keep your giving quiet.
DAFs also lend themselves to sharing philanthropic values. Your family can name your DAF, calling it Your Surname Family Foundation, for example. You can collaborate on creating a mission statement and determining where you want to direct your impact. Your estate can name your adult kids as successor advisers, or direct that the DAF be split into new accounts for each of them.
In conclusion, what's the best way to give? Your goals and constraints should direct the means. That you give is what truly matters.
Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove, based in Long Beach, CA. Russ specializes in investing, financial planning and longevity-awareness solutions.
Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove Global Advisors LLC, an independent registered advisory firm based in Long Beach, CA. He has led the firm for more than 40 years, specializing in investing, financial planning and longevity-awareness solutions. Russ is heavily involved with Stanford University's Center on Longevity, and has helped to launch the Center's symposiums and Design Challenges on aging-related challenges.
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