Economic success is at the core of the “American Dream.” Sharing our prosperity with others less fortunate is also part of our collective identity. According to Giving USA, Americans made charitable contributions of $358.38billion in 2014. 1 And 98.4 percent of affluent American households with a net worth of $1 million or more (excluding the value of their primary home) regularly give to charity, motivated by a desire to “make a difference” and “give back” to the community.2
So, it shouldn’t be surprising, then, that strategic philanthropy is being incorporated into long-term financial and estate planning.
Traditionally, a large proportion of individual charitable giving has been done in the form of checks or cash donations, but cash may not be the most efficient or strategic means for giving. Instead, designing an appropriate plan can achieve multiple goals, including targeting a specific set of causes or organizations, achieving optimal tax savings, providing tax-free asset growth and even establishing a family giving tradition.
There are a number of vehicles available to facilitate charitable-giving strategies, including donor advised funds, private foundations and charitable remainder trusts.
Among these choices, donor advised funds (DAFs) are one of the fastest-growing due to their relatively low cost, minimal administration, ease of use and flexibility.
A donor advised fund is a fund that is maintained and operated by a sponsoring charitable organization. A donor establishes and contributes to an account in his or her name and receives an immediate charitable deduction, subject to limitations based on the donor’s adjusted gross income. This individual may then make grants to qualified 501(c)(3) charities, with control over the amount and timing of the grants, but unlike what occurs with a charitable foundation, there is no annual grant requirement. All financial and administrative services are handled by the DAF, including tax documentation, record-keeping, investment activity and disbursement to the charityof your choice.
Giving to a DAF allows the donor to contribute now, locking-in a charitable donation in the current year, but decide later, even in a different tax year, which charities should receive grants. Furthermore, assets donated tothe DAF are invested until grants are made, and have the potential to grow tax free. Therefore, the donor’s giving power can increase over time.
Public charities, including donor advised funds, do not pay capital gains taxes. Donating highly appreciated securities (including their unrealized capital gains) is often a win for the charity and the donor alike. The charity accepts a donation at the fair market value of the security. The donor, in turn, receives a tax deduction for the fair market value of the security and also foregoes the capital gains tax on the donated security. Investors should consult with their tax advisor about their specific tax situation.
According to a recent study of wealthy donors, those who considered themselves “knowledgeable” about charitable giving were the most likely to monitor their giving and its impact, consult with advisors, leverage giving vehicles and achieve a higher level of personal fulfillment from their philanthropic pursuits, compared to donors who did none of these things.3
Making gifts to charitable organizations is a wonderful activity in its own right, but with some strategic planning, those donations may well become gifts that keep giving on multiple levels.
1Giving USA 2015: The Annual Report on Philanthropy for the Year 2014, a publication of Giving USA Foundation, 2015, researched and written by the Indiana University Lilly Family School of Philanthropy.
2The 2014 U.S. Trust Study of High Net Worth Philanthropy, www.ustrust.com/philanthropy, conducted in partnership with the Indiana University Lilly Family School of Philanthropy
3The 2014 U.S. Trust Study of High Net Worth Philanthropy, ibid.
Stuart C. McLeod and Camille Valentine are Financial Advisors with UBS Financial Services Inc. in Boston, Mass. UBS Financial Services Inc. Financial Advisor(s) engage Worth to feature this article. As a firm providing wealth management services to clients, we offer both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information on the distinctions between our brokerage and investment advisory services, please speak with your Financial Advisor or visit our website at ubs.com/workingwithus. The strategies and/or investments referenced may not be suitable for all investors. UBS Financial Services Inc., its affiliates and its employees are not in the business of providing tax or legal advice. Clients should seek advice based on their particular circumstances from an independent tax or legal advisor. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc., a subsidiary of UBS AG. Member, FINRA/SIPC.
This article was originally published in the December/January 2016 issue of Worth.