Taxes and Giving

Charitable Giving: Formulating Gifting Strategies

The achievement of personal financial wealth brings with it the responsibility to give back to one’s community in order to foster overall social and economic progress. As is the case in realizing personal success, you should have a philanthropic plan to be effective.

Below are some of the considerations in formulating strategies or plans for charitable giving.

Step 1: What causes or interests are most meaningful to you?

Find a cause or causes that you are passionate about—don’t spread yourself too thin.

Step 2: How much should you give?

Charitable giving must be integrated with your overall financial, tax and estate planning in order to have a consistent, sustainable impact. Consider your budget carefully. Work with a financial advisor to help you develop a personal cash flow statement based on a conservative estimate of annual earnings.

Step 3: What structure to use: private foundation or donor advised fund?

American tax provisions offer many options to promote charitable giving.

The best option for you will depend on your goals and personal circumstances. Two such options are donor advised funds or private foundations:

Donor Advised Funds (DAFs):

A donor advised fund is a fund set up and managed by a charitable organization, by community foundations or is commercially sponsored (Fidelity Gift Fund is the largest).

Subject to certain required guidelines, a fund will generally offer guidance on grant making. Gifts made to a fund are irrevocable and may be any personal asset, such as cash or marketable securities (stocks, bonds, etc.).

Depending upon the fund, gifts may be as small as $5,000 to $10,000. While gifts are immediately deductible, they are limited based on your income, type of property donated and the nature of the charitable organization to which one gives. Also, some funds may allow an individual donor, a family or a group of friends to create the fund’s name—much as if they had established a private foundation. Administration and accounting are provided at no additional charge by the sponsoring organization.

Because donor advised funds are public charities, excise taxes and minimum distribution requirements do not apply.

Private Foundations:

In contrast to donor advised funds, private foundations offer greater control and direct involvement in charitable undertakings.

However, tax and legal requirements are more complex and administrative costs are higher. Generally, private foundations are most appropriate for individuals with substantial philanthropic goals. As with donor advised funds, tax deductions are immediate. Capital gains taxes on gifts of appreciated assets are avoided. Again, like donor advised funds, the amount of the deductions is limited based on one’s income, type of property donated, and the nature of the charitable organization.

Organizers of private foundations incur the administrative obligations of operating the foundation, including annual tax filings, compliance with legal or regulatory requirements, and payment of professional fees. Private foundations are a great way to get children to share in the stewardship of family wealth and to stimulate their involvement in philanthropy.