Most high net worth individuals realize that the rewards of charitable giving stretch well beyond a tax-planning strategy. Your philanthropic pursuits reflect your personal values, ensure your legacy and in many ways give back to the communities that have helped foster your success.
Still, that does not mean you should not take advantage of the tax savings that charitable giving affords.
Understanding the tax implications does more than enable you to minimize your tax obligations. Such recognition actually allows you to give more to a given charity or cause.
Here are some tips to make the most out of your charitable giving.
WHAT TO GIVE?
Of course the easiest way to give is to write a check. However, that may not be the best way to help the charity, or yourself. From a taxation standpoint, the type of property or asset you grant results in differing consequences.
For example, did you know that if you gift an appreciated stock you have owned for more than a year, you can not only deduct the full value of the stock, but you don’t have to recognize the appreciation, or “capital gains tax,” you would have once you eventually sold the stock? The charity ultimately gets more than if you sold the stock and delivered the after-tax proceeds in cash.
However, the deductibility of such non-cash donations is limited to up to 30 percent of your gross adjusted income, whereas cash donations are allowed up to 50 percent.
Understanding the tax implications not only enables you to minimize tax obligations but allows you to give more to a given charity or cause.
Beyond “what to give,” the next question is “how”? Do you want to donate all at once, to a single charity, or to give to several charities over the course of the year, for a more lasting impact? Answering this question usually involves setting up either a donor-advised fund (DAF) or a private foundation.
A DAF is a “giving account” offered to and housed in a public charity, which may be connected to a community foundation, a financial institution or a university.
A foundation, on the other hand, is a distinct, tax-exempt legal entity governed by its own set of bylaws, with its own mission statement, board of trustees and articles of incorporation.
Which you choose has a lot to do with your individual personality, your reasons for giving and the control you desire over the use and impact of your gifts. With the DAF, the sponsoring agency has most of the control over the donations, whereas with a private foundation, most of the control remains with the donor.
A private foundation allows you to build a legacy, and in most cases, legal and financial control of the foundation and its assets can remain within the family for unlimited generations.
However, since the DAF is merely a funded account, controlled by the sponsoring recipient, investment alternatives offered by the DAF may be limited, and the legacy of giving terminates after one or two generations.
There are also differences between the two options in terms of contributions and deductions, with deductibility limits generally greater with DAF contributions than a foundation.
Other, more sophisticated, giving strategies beyond the DAF or foundation which high net worth individuals may want to consider include:
• Charitable remainder trusts
• Charitable lead trusts
• Charitable gift annuities
• Remainder interests in a life estate
GIVING BACK HAS ENORMOUS IMPACT
According to a recent Bank of America study on philanthropy, high net worth individuals account for only 1.4 percent of the U.S. population, yet their charitable donations account for more than 70 percent of the total gifts to charity from individuals, an amount in excess of $250 billion dollars.
There is no question that the charitable giving of high net worth individuals does genuine good for society.
By taking a strategic, planned approach to charitable giving, you not only can achieve more impact, but leave in place a formula that ensures your legacy of giving for many years to come.
This article was originally published in the December 2016/January 2017 issue of Worth.