As varied as the number of reasons that individuals and families make philanthropic gifts, so are the methods by which they can structure their donations. The following information details the mechanics and advantages of some of the more popular gifting solutions. Most charitable vehicles can be placed in one of four board categories.
Direct gifts are the most common form of gifting and are frequently used by donors who want to give varying gift amounts to many charities. They consist of cash or property and are made payable directly to charitable organizations. Direct gifts are immediately excluded from the donor’s estate and the income tax deduction limits are based on the type of organization and property gifted (e.g. a cash gift to a public charity can be deducted up to 50% of donor’s adjusted gross income). Unused deductions can be carried forward up to five years.
Split-interest vehicles include charitable remainder trusts, charitable lead trusts, pooled income funds and charitable gift annuities. Donor’s with highly appreciated assets looking to diversify their portfolio and increase after-tax income, often find charitable remainder trusts to be very appealing. A charitable remainder trust allows you or someone you designate to receive cash payouts for the trust’s term and one or more charities designated by you receives the remainder. A charitable lead trust is more or less the reverse; charities receive payouts for a pre-determined term and you or someone you designate receives the remainder.
A key benefit of using a charitable remainder trust is that you have the ability to update or adjust the designated charitable beneficiaries if your philanthropic mission changes over time. They can also facilitate tax-efficient transfers of low cost basis assets.
Depending on your charitable goals, one disadvantage of using a charitable remainder trust is that the benefit to the charity can be delayed. Additionally, annual trust tax returns need to be filed and there are set up and ongoing expenses for the trust.
Philanthropic structures include donor advised funds, community foundations and support organizations. Virtually non-existent a decade ago, donor advised funds have exploded into a more than $23 billion market through 2007, and they are the most popular in this category. They are administered by non-profit organizations, which generally offer low minimum contributions and administrative expenses.
Donor advised funds allow you and/or one or more designees to act as a “donor advisor” who recommends grants over time to tax-exempt organizations as well as set up the time-table of when charitable grants will be distributed. A donor’s beneficiaries can assume an advisory role after his or her death and because there is no excise tax, more funds are available for gifting. Gifts can be anonymous if desired.
It is important to note that the sponsoring charity of a donor advised fund does have final say on grant recommendations or the investment of fund assets. The fund may also include program and investment fees.
Private foundations allow maximum flexibility and control over board membership, administration, investments and disbursement of donations. They instill positive family values and ensure the family legacy well into the future. Additionally, assets are removed from the family estate, eliminating gift and estate tax liability. Once assets are placed in the foundation, they are not subject to income tax.
Contributions to a private foundation receive less favorable tax treatment than contributions to public foundations. Tax filings are public record and tax deductions are limited to 30 percent of adjusted gross income for cash and non-appreciated property and 20 percent of adjusted gross income for appreciated property. Net investment income of the foundation is subject to two percent federal excise tax.
Whatever your age, income level or family situation, there is an appropriate philanthropic solution. For some, outright gifts will remain the vehicle of choice. For others, searching for a higher level of personal involvement, the answer is a private foundation. No matter the solution, expert legal and accounting counsel should be sought by clients and advisors before constructing a personal framework and strategy for giving.