How to plan your charitable giving strategy

There are many reasons to give to charity, including honoring a loved one, creating a legacy and supporting a cause. Depending on your situation, charitable gifts may also help lower income taxes, and there are a number of charitable giving strategies you can use to achieve those goals.

The easiest way to make a charitable gift may be to write a check or use a 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 help ensure the strategy you pick fits your overall financial goals.

Give now or later: Donor-advised funds (DAFs) and private foundations

If you give to many charities and want to simplify your tax reporting, two options to consider include giving to a DAF or a private foundation. Both strategies allow you to make an irrevocable contribution and potentially “front-load” multiple years of giving (or, if you prefer, make multiple contributions over a period of years). You generally receive an acknowledgment for each contribution, and you can recommend grants from the contributed assets to recipient charities over time. You may receive a charitable income tax deduction in the year you make the contribution, subject to applicable limitations.

Donor-advised fund (DAF)

A DAF is a charitable giving vehicle administered by a public charity that allows you to set aside assets for charitable purposes while the sponsoring charity handles the administration. Contributions to a DAF receive one of the most favorable tax deductibility treatments, subject to applicable limitations. While you (as the “advisor”) can typically recommend how the assets are invested and which charities receive grants, the sponsoring organization ultimately owns the assets and has final approval over both. In general, there is no universal requirement to make grants to recipient charities immediately after funding a DAF, although sponsoring organizations may have their own rules.

Private foundation

Like DAFs, private foundations allow you to set aside money for charitable purposes. Unlike DAFs, private foundations are managed privately by the primary funder and a team selected by the funder to oversee compliance and reporting. Contributions to a private foundation are generally subject to lower charitable deduction limits than contributions to a DAF. However, you retain direct control over investments and charitable distributions. 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 an 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 nonoperating foundation generally must make annual qualifying distributions based on 5% of the value of its noncharitable-use assets, subject to adjustments.

Involving family in charitable giving decisions

While a DAF may limit who can serve as an advisor at one time (depending on the program), it can also allow for successor advisors. A private foundation is run by a board of directors or trustees. In each instance, successor advisors, directors and trustees can include family members. You can use these strategies to involve your family – especially your children – in charitable endeavors.

Planned giving: Gifts over time and legacy gifts

A planned gift generally refers to a gift made 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 what you’ve designated for them after you die. There’s generally no immediate tax benefit to making a charitable bequest at death, but your estate may be 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 remainder trusts (CRTs) or charitable lead trusts (CLTs).

Gift annuities

With a gift annuity – which is a contractual arrangement between you and a charity – you give a charity a sum of money and, in exchange, the charity agrees to pay you a certain amount each year for life. This annuity amount depends on many factors, including your age and the charity’s policies. Many charities use standard payout rates, which may change based on prevailing interest rates. When you establish 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 deduction and timing.

Charitable remainder trust (CRT)

A 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 up to 20 years or for your lifetime. Your upfront charitable deduction is generally equal to the present value of what the charity is projected to receive at the end of the trust term, based on interest rates published by the IRS. The amount remaining at the end of the trust term – whether higher or lower than your deduction – will pass to charity. A CRT is generally exempt from federal income tax, so highly appreciated assets can be sold by the trust without immediate capital gains tax; however, as payments are made to you, you may need to include them as ordinary income or capital gains. The tax implications can be complex, so consult your legal and tax advisors.

Charitable lead trust (CLT)

A CLT functions as the reverse of a 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 upfront charitable income tax deduction based on the present value of future payments to charity. Unlike a CRT, a CLT is not tax-exempt; as a result, any income generated will generally 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 – can be confusing. Connect with a J.P. Morgan professional to help you evaluate your options, alongside your legal and tax professionals.

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