Here’s a simple philosophy on giving: be as generous as possible in the smartest way possible.
The generous part depends on your own situation. Being smart about how you give depends on understanding the landscape of giving vehicles available to you.
Different means of giving offer different tax benefits as well as varying levels of privacy, complexity, and flexibility. Casual givers may find that simple checkbook giving suits their needs, but being educated on the array of options allows them to grow into more strategic givers.
Let’s look at four major ways donors give.
Checkbook giving is shorthand for any sort of cash giving, whether writing a check, handing over cash, or punching in your credit card number. Most givers, even those employing more complex giving vehicles, still end up giving out of cash at some point during the year. It’s simple, fast, and at the ready.
For the small-dollar giver, giving out of pocket often makes the most sense, especially when giving is factored into one’s budget.
The downside to checkbook giving is the giver is limited to what is on hand in the bank account. Some checkbook givers do take the extra step of setting aside money in a separate savings account, which is a simple and smart strategy for building up funds.
The other downside to checkbook giving involves the administrative side, for which you as the giver are on your own. Keeping up with receipts and ensuring checks get cashed is simple enough when you only give to a few groups. As your charitable portfolio grows, however, it may be time to look to one of the other giving tools.
Most people have some passing familiarity with private foundations, if only because they see foundation names emblazoned on museum walls. The massive, professional foundations such as Gates, Ford, and Rockefeller get the most airplay, but the smaller family foundation can be a helpful vehicle for a donor interested in maintaining control of one’s giving inside a formal structure.
Many tax attorneys don’t recommend starting a private foundation with less than $5 million, though they can be started at any amount. Starting a foundation requires certain legal fees and start-up costs. There are ongoing expenses and legal requirements, such as required board meetings and annual tax fillings. All of a foundation’s grants and assets must be listed on that tax filing.
Despite the complexity, a private foundation offers a way for a donor to define their own charitable path. There is flexibility within a foundation to fund any number of charitable organizations, provide direct aid, or establish scholarships programs. The donor generally sits on the board and has a hand in all grant decisions. Leadership of the foundation can pass down to future generations, making it a helpful way to instill giving traditions and pass down charitable wealth.
For donors with a big goal, a foundation offer the institutional structure to pull the lever toward what they want achieve.
The vehicle drawing the most attention over the past decade is the donor-advised fund (DAF). DAFs combine many of the benefits of checkbook giving with a structure similar to a private foundation, plus the added benefit of having the back-office administrative side handled by the DAF provider.
Earlier, I mentioned the idea of a donor setting aside cash in a savings account dedicated to charitable giving. A donor-advised fund serves that purpose in a more formalized way, but has the added benefit of allowing you to receive your tax deduction immediately when you put funds in the DAF account (here’s a quick video on how DAFs work). Many donors appreciate that added flexibility. Gifts given through a DAF account also allow for additional privacy for donors interested in that.
The tax benefits of giving into a donor-advised fund are the same as if you gave directly to charity (the benefits are slightly less for gifts into a private foundation). Most fund providers will allow you to open an account for between $5,000 and $10,000, an obtainable sum for many donors. Ongoing expenses range from .6%-2% of the fund assets depending on the provider.
Donor-advised funds aren’t perfect for everyone. Donors need to understand that their gift into a DAF is an irrevocable charitable contribution to the provider. While the provider offers advisory privileges over the giving from one’s fund, the provider does have the legal right to decline a request.
Different DAF providers will decline gifts for different reasons, and it’s important to understand any limitations your provider may have on outgoing gifts. The upside is you can find a provider that matches your strategy, which means if they say no to a gift, it probably wasn’t one you actually wanted to do in the first place.
Lumping all planned giving vehicles into a single section asking this section to do a lot of work as there are many and they are complex.
Planned gifts are any of the various tools donors use that go beyond annual giving. These can be tools for passing on wealth (charitable lead trust), creating an income-stream (charitable remainder trust and charitable gift annuities), or simple bequest gifts.
Well-structured planned gifts enable donors to do more with their resources than they otherwise might (thanks to various tax benefits), and to do so over a longer period of time. Such gifts may utilize the power of donor-advised funds or private foundations as well.
Get an estate planning attorney and/or investment advisor involved in creating planned gifts as early as possible. These gifts are complicated, but for donors thinking beyond annual giving, thoughtful consideration of these tools enables a powerful charitable giving legacy.
Which tool is right for you? That depends on your situation – and may change over time. And all these charitable tools can be used simultaneously as well. No matter the vehicle, remember that any tool for giving should be in service of the key goal: be as generous as possible in the smartest way possible.