How to plan for charitable giving
Managing Director, Head of Wealth Planning and Advice, J.P. Morgan Wealth Management
There are many reasons to give to charity, including honoring a loved one, creating a legacy, supporting a cause, and potentially lowering income taxes, and there are a number of charitable giving strategies you can utilize to achieve those goals.
The easiest way to make a charitable gift is to write a check to a charity or make the gift with your credit card, but an immediate cash gift may not always be the most appropriate strategy for achieving your philanthropic goals.
Here are a few considerations to ensure the strategy you pick fits your overall financial goals.
Give now, or give later?
If you give to a large number of charities and want to simplify your tax reporting, two options to consider include giving to a donor-advised fund (DAF) or a private foundation. Both strategies allow you to make a single irrevocable contribution to “front-load” multiple years of gifts (or, if you prefer, you can make multiple gifts over a period of years). You receive a single acknowledgement for each contribution, and you can distribute the contributed assets to end charities over time. You generally will receive a charitable income tax deduction in the year you make the contribution, equal to the fair-market value of that contribution.
- DAF: DAFs are a charitable giving strategy administered by public charities that allow you to separate out a bucket of money for charitable purposes while offloading all of the charitable administration to the public charity. Gifts to a DAF receive one of the most favorable tax deductibility treatments. However, when making gifts to a DAF, while you (as the “advisor”) can still advise the fund on how you want the assets invested and make recommendations as to which charities should receive gifts from the fund, ultimately the fund itself owns the assets you’ve contributed and has the final say over both of those matters. In general there is not a specific requirement to give money to end charities from your DAF after you’ve funded it, although some DAFs may have their own rules.
- Private Foundation: Like DAFs, private foundations allow you to separate out money for charitable purposes; however, unlike DAFs, private foundations are managed privately by the primary funder and a team selected by them to oversee its compliance and reporting. When making gifts to a private foundation, you are subject to lower deductibility limitations than you would be had you made gifts to a DAF. However, you retain direct control over both investments and ongoing charitable distributions from the foundation. As a result of this retained control, private foundations are subject to a complex set of rules covering what they – and their major donors – can and cannot do. Private foundations are also required to file a separate annual tax return (Form 990-PF), which includes a list of board members, contributors, grant recipients and assets. Ironically, this return is a public document. A private foundation must distribute 5% of the value of its assets (often valued at the end of the prior year) to charities each year.
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Involving family members in making decisions for your charitable vehicles
While a DAF may only allow one advisor at a time, it also can allow for a succession of advisors. A private foundation is run by a board of directors or trustees. In each instance, the successor advisors, directors and trustees can include family members. You can use these strategies to involve your family – especially your children – in charitable endeavors.
Making a planned gift
A planned gift generally refers to a gift over time, like a multi-year pledge or a promised gift that is satisfied at your death.
In addition to making a multi-year pledge (where you agree this year to make a gift in installments over a few years), a common and relatively straightforward way to make a planned gift is to name one or more charities as beneficiaries under your will, revocable trust or retirement account. That way, the charities you name will inherit whatever you have designated for them after you die. There’s no immediate tax benefit to you to leave a charitable bequest upon your death, but your estate is entitled to a charitable estate tax deduction for the value of this gift.
More complex planned giving can include gift annuities or “split-interest trusts,” such as charitable lead trusts or charitable remainder trusts.
- Gift annuities: If you enter into a gift annuity – which is a contractual arrangement between you and a charity – you give a selected charity a sum of money and, in exchange, the charity agrees to pay you a certain amount each year until your death. This annuity amount depends on many factors, including your age and the charity’s policies. Many charities use standard payout rates, which change based on prevailing interest rates. Upon entering into the gift annuity, you may receive an income tax deduction for the present value of what is expected to be left for the charity at the end of the annuity period. Your tax advisor can help you determine the appropriate tax deduction and its timing.
- CRT: A charitable remainder trust (CRT), managed by a trustee, pays you each year either a fixed amount or a fixed percentage of the value of the trust’s assets, revalued each year. The payments are for a term of either between two and 20 years, or for your lifetime. Your up-front charitable deduction is equal to the present value of what the charity is projected to receive at the end of the trust’s term, based on interest rates published by the IRS. The amount remaining at the end of the trust’s term – whether higher or lower than your deduction – will pass to charity. A CRT is a tax-free entity, so highly appreciated assets can be sold by the trust with no immediate capital gains tax paid; however, as payments are made to you, you may need to include them as ordinary income or capital gains. The tax implications of these payments can be complex and you should consult with your legal and tax advisors.
- CLT: A charitable lead trust (CLT) functions as the reverse of the CRT: A charity receives annual annuity or percentage payments for a certain number of years (or your lifetime), and your family receives the balance of the trust assets, if any, at the end of the trust term. Depending on how the CLT is structured, you may be entitled to an up-front charitable deduction equal to the amount contributed to the CLT.
Unlike a CRT, a CLT is not tax-exempt; as a result, any income generated will be taxable on an annual basis, either to you or to the CLT.
Ensuring that your charitable giving strategies efficiently align with your philanthropic goals – and your broader financial goals – may at times be confusing. Connect with a J.P. Morgan professional to help you evaluate your options before you speak to your legal and tax advisors.
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