Charitable giving increased 7.5 percent in first half of 2020 on a year-over-year basis, according to the Fundraising Effectiveness Project. But, while the pandemic has spurred a new wave of charitable donations, some charities are struggling. Cancelled galas, abandoned auctions, and other fundraising events have created a financial void for a wide swath of organizations. In fact, nonprofits lost more than 50,000 jobs in December.
As the gap between charities’ ability to raise funds and the demand for their services grows wider with the pandemic, philanthropy is taking on even greater importance. With more people looking to get involved in one form or another, it’s important to know the various philanthropic options available, as well as their potential benefits and limitations.
Donor-advised funds (DAFs)
A donor-advised fund is a giving vehicle established at a public charity that allows donors to make an irrevocable contribution of personal assets such as cash, stock, real estate and more. Not only do donors receive an immediate tax deduction when the initial gift is made, any balance not redistributed to nonprofits at the onset can be invested and grow tax-free to increase your impact over time. DAFs also give donors the opportunity to recommend grants from the fund.
There are many benefits to DAFs, but they are not an appropriate giving vehicle for all situations. The tax structure is complex compared to other types of giving and it is important to seek advice from a qualified tax professional on making contributions that follow IRS guidelines.
Charitable trusts
A charitable trust can offer a number of philanthropic advantages, while at the same time providing an avenue to organize your assets for you, your beneficiaries, and a charity. There are two main types of charitable trusts:
Charitable Lead Trust: this irrevocable trust is primarily designed to lower a beneficiary’s taxable income over their life. By transferring assets into the trust, you then designate one or more charities to receive a stream of income generated by the assets for a defined period of time. At the end of each period, the remaining assets in the trust are disbursed to other beneficiaries or remain in the trust. There are nuances to setting up these trusts and we advise that you consult with both a qualified tax professional and a qualified legal professional.
Charitable Remainder Trust: this is essentially an inverted version of the Charitable Lead Trust. Beneficiaries or the donor receive income first, and the remainder is distributed to the charitable organizations. By transferring assets into the trust, you then designate one or more charities to receive the balance of the assets upon after a defined period of time in which you receive an income stream produced by the trust. Like Charitable Lead Trusts, there are nuances to setting up these trusts and we advise that you consult with both a qualified tax professional and a qualified legal professional.
Private foundation
Private foundations are charities that are established as corporations or a charitable trust and provide donors with a tax deduction for their contributions. The Bill & Melinda Gates Foundation is perhaps the most recognizable example, with more than $38 billion in assets and mandates to help all people lead healthy, productive lives. While there are strict regulations and tax laws pertaining to private foundations, they can be a great way for involving family participation and creating a lasting legacy. There is ongoing management required for foundations and we advise consulting with a tax professional and legal professional.
Of course, the charitable giving vehicles mentioned here represent only a few of the options available. They also might not be the best path for you given your situation and goals. Be sure to seek advice to determine how you might be able to make the biggest impact that works for you.
If you are interested in learning more about charitable giving options, please don’t hesitate to reach out to your Portfolio Manager– we are always here to help.
DISCLOSURE: The information above (the “Insight”) is educational in nature and should not serve as the primary basis for your investment or tax planning. Reynders, McVeigh Capital Management, LLC (“RMCM”) does not provide legal or tax advice. Please consult an attorney or tax professional regarding your specific situation. This Insight is proprietary and may not be reproduced or transmitted to any third party without the prior, written consent of RMCM.
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