You can always write a check to your favorite cause, but if you want to make a significant commitment to charitable giving, a carefully planned gift may give you a significant tax break, generate an income stream for your family or help build a legacy that will last for generations.
Deciding which option is best for you depends on a variety of factors, says Ellen E. Spong, Philanthropic Specialist and Senior Vice President for Wells Fargo Philanthropic Services. “Start by thinking about what things are most important to you and what you want to accomplish from a philanthropic perspective and from a community perspective,” Spong says. “There are so many different strategies and vehicles, and there’s no one size fits all. It’s highly individual.”
Start with your wealth, tax, and legal advisors, and consider the following questions: What legacy do you and your family want to leave? What type of cause do you want to support — the arts, medical research or something else? Do you want your giving to take place during your life, during your children’s lives or for many generations to come?
A key question, Spong says, is whether you want to benefit an existing organization that you’re passionate about and possibly derive an income stream for your family while you’re alive, or if you would prefer to benefit many charities over a longer period of time.
A lasting legacy
If your goal is to build a long-term philanthropic legacy for your family, consider a private foundation or a donor advised fund, Spong says. Both allow you to take a charitable deduction for your gift, and the funds are used to make grants on an annual basis. But there are some key differences:
- A Private Foundation. Often established with $5 million or more, a private foundation allows you to support causes around the world or just in your hometown, (or a little of each – you decide), and it can give you complete control over investments and grant making. With the control, however, comes a high level of responsibility. “There are strict legal, financial and administrative requirements for managing it and making the distributions,” Spong notes. “That’s where Wells Fargo can really be helpful. We offer strategy and administrative support, and we work closely with families to guide them through distributions.” Expect to pay legal and accounting fees, and remember, even though it’s called a “private” foundation, your grant making will actually be very public, reported annually in the foundation’s tax return called a 990PF.
- Donor Advised Funds. A more flexible alternative to a foundation, a donor advised fund can be established for as little as $10,000. You make your gift to a fund administered by a sponsoring organization, often the charitable arm of a financial-services institution like Wells Fargo or a religious or community foundation. Then, you make recommendations about how the money should be distributed to various charitable organizations, with the sponsor making the final decision. Donor advised funds have become popular in recent years because they’re easy to set up and don’t have the same strict requirements as a foundation. The sponsoring organization administers the fund and makes all investment decisions. Because you have less control, consider well-established funds, Spong advises, and make sure you understand the fees, goals and restrictions before you give.
If giving to one organization or a few select charitable organizations is a better fit for your philanthropic plan and you would like to receive some income tax benefit from your contribution, you should consider a charitable remainder trust, a charitable lead trust or a charitable gift annuity.
“What’s nice about these arrangements is that you have the ability to be recognized during your lifetime, but you don’t have to give up everything,” Spong says. “It’s a sharing arrangement. One additional benefit with the charitable remainder trust and charitable gift annuity options is that you can get an income stream for life.”
Typically, you will develop the terms of your gift directly with the charity, but here’s what you should know about each of those options:
- A Charitable Remainder Trust. You contribute to a private trust, which will pay you or your family an income for a set period of time. At the end of that time or when you die, any money that’s left over, “the remainder,” passes tax free to the charity. You get a charitable tax deduction for your donations and preferential tax treatment on gains on appreciated property, if applicable, but the income steam will be taxable. Depending upon what type of charitable remainder trust you set up, the income you receive may be fixed or may change based on the value of the assets in the trust.
- A Charitable Gift Annuity. Another way to make a gift and also receive income, this method is simpler than a charitable remainder trust because it does not require drafting a trust agreement. Instead, you establish a contract with a charity that promises to pay you a fixed rate of income for life in exchange for your gift of cash or appreciated property. Again, you can take a charitable tax deduction and get preferential tax treatment on gains on appreciated property. In this case, the charity is taking on the market risk by promising to pay you a specific income regardless of what happens to the value of your gift. “These are very popular right now,” Spong says, “because their rates far exceed any rate you’d get on CDs, bonds and other fixed income instruments.”
- A Charitable Lead Trust. Almost the opposite of a charitable remainder trust, this is a type of planned gift that provides an income stream to a charity for a set period of time. At the end of that period, the assets are either distributed back to you or skip a generation and go to your beneficiaries, depending on the trust structure. “It’s like the charity is borrowing the asset legally on a short-term basis,” Spong explains. “It can be a great way to benefit a charity now without giving up your or your family’s access to those assets at a later date.” Charitable lead trusts are usually set up as estate-planning tools, and tax deductions and the tax treatment of income depend on the structure of the trust. These types of trusts are complex and require careful planning, making them a good option if you have significant funds to donate.
Michelle Crouch writes about consumer financing, parenting and more from her home in Charlotte, N.C. Her work has appeared in The New York Times and Reader’s Digest.
Photography by Casey Templeton
Smart giving can help increase your impact on the causes you champion. Learn “7 Ways To Help Build a Smarter Charitable Giving Strategy” to help make your giving more effective.