Charitable giving is a great way to leave a lasting legacy on your local community. Donors often want to include charitable giving in their estate plan but are often unsure of the best way to achieve their charitable goals. Most donors typically want to make sure of two things. First, that their gifts are actually used for their intended purposes and, second, that the donor receives the maximum tax benefits for making the charitable gift. While not a complete discussion of charitable giving, below is a brief summary of some ways in which donors can make charitable gifts.
Gifts During Lifetime
Making an outright gift to charity during a donor’s lifetime is the simplest way to make a charitable gift. A donor simply picks his or her favorite charitable cause and writes a check to the charity for the desired amount. Donors who plan to give regularly, can even make monthly automatic transfers directly from their bank account to the charity. In addition to feeling good about contributing to their favorite cause, donors may report the gifts on their income tax return and receive a charitable deduction if they itemize deductions.
The rules for taking a charitable deduction are too complicated to discuss in detail here. However, as a general matter, a gift of cash to a public charity will result in a deduction from the donor’s adjusted gross income equal to sixty percent (60%) of the value of the gift. If the gift is of something other than cash (such as gift of stock, artwork or other tangible property) the amount of the deduction will depend on the type of property given (i.e. ordinary income property, long term capital gain property, business interest). The donor must also comply with the Internal Revenue Service’s substantiation rules for all types of gifts, or risk being denied a charitable deduction on their income tax return.
Donor Advised Fund
A donor advised fund (“DAF”) is another way to make a gift to charity. To create a DAF, the donor contributes a gift to a financial account under the control of a “sponsoring organization” in which the donor retains advisory privileges. Donors can make either one large gift, smaller continuing gifts, or a bequest to the DAF in their will or trust. The donor receives an immediate charitable deduction in the year of the gift (unless the gift is by bequest) and the money is held by the sponsoring organization which then invests the assets. The gift is irrevocable and the donor gives up all right, title, interest and control in the gifted property but the donor may advise the sponsoring organization on how he or she would like to see the gift used.
A sponsoring organization generally charges administrative fees for managing the account and some have minimum requirements to set up a DAF. However, DAFs are advantageous because of their flexibility, because donors have a meaningful say in how their gifts are ultimately used, and for taxpayers that do not itemize deductions, DAF’s can allow for one “bunched” gift that is deductible and sprinkled out in small doses to various charities over the year. They are also less complicated to create and therefore less expensive than a Private Foundation. If, for example, a donor wants to make a charitable gift but also wants to retain flexibility in the event their charitable goals change over time, a DAF can be a great vehicle to use for charitable giving.
Private Foundation
A Private Foundation is another vehicle for making charitable gifts. Creating a Private Foundation involves the formation of a separate legal entity with its own tax identification number that must request tax exempt status from the Internal Revenue Service. As a result, Private Foundations will typically require substantial legal and tax advice from a lawyer and/or an accountant and are typically used by donors making very large gifts ($5 million or more). However, the donor or donors who create a Private Foundation receive an immediate charitable deduction on their income tax return (of up to 30% of adjusted gross income for cash gifts) and are able to maintain complete control over giving during their lifetime and in perpetuity through family and board members (unlike a DAF or outright donation).
Specific Bequest in Will or Trust
Some donors choose to make charitable gifts at their death through a bequest in their will or trust. By giving at death, donors have the benefit of retaining control over their property until they no longer need it. However, because the gift does not actually occur until death, a donor does not receive a charitable deduction on an income tax return. Instead, the donor receives a charitable deduction on an estate tax return, if they are required to pay estate taxes. Fortunately, most Americans need not worry about filing an estate tax return because the estate tax currently applies only to individuals with more than eleven million dollars.
Despite the lack of a tax incentive, many donors still choose to leave a portion of their estate to charity. However, giving to charity through a bequest in a will or trust can be tricky without the proper advice. Some donors, for example, bequest a specific dollar amount to charity in their will or trust which can have unintended results. If the donor bequests “$100,000 to Charity A” and only owns $125,000 in assets at his death, for example, Charity A receives $100,000 while donor’s other beneficiaries receive only $25,000, which was probably not the donor’s intent. This result can be easily avoided with proper planning (such as expressing the bequest to charity in percentages) and sound advice.
A properly drafted estate plan should also address the possibility that a chosen charity may no longer exist at the time of the donor’s death. Some donors have a loyalty to a particular cause rather than the particular charity designated in their estate plan. With the donor’s permission, the donor’s estate planning documents may grant their executor or trustee discretion to make the gift to a different charity supporting the same cause, if the charity designated in the will or trust is no longer in existence. Other donors, however, may desire for their gift to go to one particular charity and no other and their estate plan should reflect that intent.
Finally, some donors desire to be very specific about how they want their gift to be used. If so, the bequest language needs to be very carefully drafted. Overly specific language could lead to an administrative burden on the charity or in extreme cases create a dispute or litigation between the charities and the donor’s family members. Overly broad language, on the other hand, could result in the gift being used for purposes not intended by the donor. Donors should seek advice to ensure the language is specific enough to ensure the donor’s intent is achieved without causing administrative problems for the charity or litigation after the donor’s passing.
Giving to charity is a great way to leave a lasting impact on your local community. If you are thinking about making a charitable gift, do not hesitate to meet with your local community organizations, your tax advisors, and your estate planning attorney. Doing so will provide valuable resources and education to make sure your gift reaches its maximum impact on the local community, you receive maximum tax benefits, and you ensure your gift actually achieves your goals.
