By Kevin Kerrigan
Americans donated nearly $260 billion to charitable causes last year, according to Giving USA Foundation. The impressive figure demonstrates the value that U.S. residents, businesses and nonprofits place on charitable giving, but it is an ongoing challenge for top earners to find effective gifting strategies that maximize the tax benefit of their charitable donations.
Here are two gifting strategies worth exploring when making large donations.
A donor-advised fund is a fund that is designated for charitable giving and allows you to make a large charitable deduction in a year, grow your invested funds over time and be able to decide in later years which charitable organizations you would like to benefit. Organizations like Fidelity, Schwab and Vanguard are just a few that have large donor advised fund businesses.
Setting up a donor-advised fund requires very little paperwork or administrative responsibility involved for the donor. Donors receive an immediate charitable tax deduction for the full amount they contribute – even before the funds are distributed to selected charities.
Keep in mind:
The tax deduction occurs when the funds are deposited in the account. If the investment increases in value, you will not receive an additional tax benefit when the charity receives the donation. You’re also not taxed on any earnings in the fund.
- You can name your children as advisors or successor advisors to create a family legacy.
- Donating to the fund is an irreversible transaction. You won’t be refunded, even if capital invested in the fund hasn’t yet been distributed. Make sure that money deposited as a result of a windfall won’t be needed later, in leaner years.
- You can donate appreciated securities that have been held for more than a year and get a tax deduction for the full fair market value.
- Before investing, verify that your charity of choice is on the fund’s approved list or that it will be added at the donor’s request, so you don’t open a fund and later select a charity that’s not approved.
Private foundations are similar to donor advised funds in that a tax deduction occurs when a donation is made to the foundation, and the amounts can be disbursed to charitable organizations in subsequent years.
Establishing a private foundation is a popular way for families and individuals with a great deal of wealth to manage charitable contributions. The foundation often outlasts its founder and becomes part of a family’s legacy of giving back. For example, Americans are still benefiting from foundations established by John D. Rockefeller, Andrew Carnegie and Henry Ford. It is common to include generations of family members on the foundation’s payroll and involve them heavily in leadership and gifting strategies. Private foundations have a broader array of gifting options and can establish scholarship programs and run their own charitable activities.
The primary downside of private foundations is that there are set-up costs to establish them and to administer annually. Many private foundations hire their own personnel to handle day-to-day administration and set long-term charitable goals. You will need a lawyer to assist in the setup of a private foundation and a CPA to handle annual tax filings. Consider a Private Foundation if you have the wealth to cover the costs and the time to devote to the administration.
Before finalizing any gifting strategy, consult a tax specialist, who can help you to maximize your donation’s value and avoid potential issues.
Kevin Kerrigan, CPA is a partner and consultant in the Tax Services Group at Wiss & Company, LLP. Reach him at firstname.lastname@example.org or 973.994.9400.