Philanthropy is often a central component of comprehensive wealth planning. Fortunately, US laws recognize the important societal benefits of charitable giving, and provide significant opportunities for the well-prepared to maximize their impact.
Here are some of the common strategies we employ:
- Private Foundation: A family foundation allows for tax-deductible contributions of cash or appreciated property, and generally requires a minimum of 5% of assets to be annually distributed to various charities. In many cases, the entire family is involved in running the foundation, with each person taking on various roles according to their unique abilities.
- Donor-Advised Fund: This operates similar to a private foundation, but allows for complete donor privacy and sometimes even more favorable tax treatment. In addition, there is no annual distribution requirement, which makes for easier administration.
- Charitable Remainder Trusts (CRTs): These immensely powerful trusts are generally funded with appreciated stock or property. The donor receives a substantial tax deduction when funding the trust, along with ongoing income from the trust over its term (typically the lifetime of the donors). The assets then pass to charity upon the trust’s expiration. If the trust’s investment returns exceed the distribution rate, the charitable bequest can be magnified. This strategy is commonly used in the early years of retirement to convert a highly appreciated asset into a source of ongoing income.
- Charitable Lead Trusts: With this trust, qualified charities receive income throughout the trust’s term. After the term expires, the remaining trust assets typically revert to the original grantors or their heirs. If the portfolio return exceeds the distribution rate, it can represent a way to efficiently transfer assets to one’s heirs while minimizing gift and estate taxes.
- Informal giving: To maintain flexibility, some people wish to operate outside the confines of a formal giving strategy. In these cases, we often employ techniques such as donating appreciated securities, utilizing qualified charitable distributions from retirement accounts, “bunching” donations for tax purposes, etc.