Balentine has had the pleasure of working with many philanthropically oriented clients, all of whom have accomplished their charitable giving in myriad ways, including direct gifts, donor advised funds (DAF), private foundations, and charitable trusts. Naturally, each charitable giving vehicle comes with its own set of advantages and disadvantages. As such, before structuring a gift, it is necessary to consider what’s most important given one’s specific situation and goals.
Direct Gifts are the easiest method for supporting your favorite charities and are most frequently accomplished by writing a check. However, donors should consider the benefits of gifting highly appreciated property, such as stock, as a means to avoid realizing capital gains. For those subject to a required minimum distribution (RMD), consider the value of making a qualified charitable distribution directly from your retirement account as a means to minimize your taxable income.
Donor-Advised Funds (DAFs) are investment vehicles established at public charities (e.g., Triangle Community Foundation and Community Foundation for Greater Atlanta) that allow donors to set up an account within the fund and receive an immediate charitable deduction on their income taxes for the amount contributed. The donor is involved in determining the investment allocation and recommending charitable grants, while the fund manager handles administrative matters (e.g., record keeping and IRS reporting) and has ultimate fiduciary responsibility. DAFs are considered public charities and no annual payout is required. These are attractive alternatives to direct gifts in years when taxable income is unusually high, such as following the sale of a business or realizing large gains on investments or real estate. DAFs can usually be established with minimum gifts ranging from $5,000 to $10,000 and are considered less complex than private foundations while also providing the potential for larger tax deductions.
Private Foundations, like the Bill & Melinda Gates Foundation, differ from donor-advised funds in that they are separate non-profit entities governed by a board of directors that controls how assets are invested and distributed as grants. Given the costs and administrative complexities to set up and maintain, private foundations are generally only appropriate for large gifts—minimum recommendations range from $1 million to $10 million dollars. Private foundations lack the privacy afforded donors to DAFs; annual tax filings are public and easily searchable through websites such as FoundationCenter.org and GuideStar.org, which detail grants and board compensation. Additionally, private foundations are deemed private charities and are therefore required to make annual distributions of at least 5% of their assets to qualified charities.
Charitable Trusts are generally irrevocable and are a great way to remove assets from one’s estate, obtain tax deductions, avoid capital gains, and—in the case of a Charitable Remainder Trust—create an income stream.
- A Charitable Lead Trust (CLT) is usually structured for a particular charity or charities to receive a certain amount of assets from the trust on an annual basis. At the end of the trust term, the remaining assets go to a designated beneficiary. CLTs are frequently used to ultimately transfer assets to family members while reducing the size of any gift tax due.
- A Charitable Remainder Trust (CRT) is usually structured for the donor to receive an income stream for a period of time—even until death—at which point the remaining assets go to a designated charity or charities. CRTs can help monetize highly appreciated assets that do not create income, such as a non-dividend paying growth stock. Assets can be transferred into a CRT, sold without incurring an immediate capital gain, and reinvested in a diversified manner to create the donor’s desired income stream. A charitable deduction is available the year that the gift is made based on several factors.
Regardless of the manner in which you support your favorite charities, here are a few hints to ensure that you ultimately get the most from your gift:
- Make sure you are itemizing expenses on your federal tax return. Being overly generous will not help reduce your taxes if you claim the standard deduction amount on your return.
- Ensure donations are made by the end of the calendar year—quickly making donations before filing your taxes just pushes the deductions you can claim into the next tax year.
- Support charities that are tax-exempt under section 501(c)(3) of the Internal Revenue Code. Among other things, tax-exempt organizations cannot benefit private interests, nor can they campaign for or against political candidates. The IRS provides an Exempt Organizations Select Check, an online search tool that allows users to search for exempt organizations, as well as check their federal tax status and filings.
- Keep your receipts! Ask the charity’s development team for formal recognition for your gift if you don’t receive one. At minimum, gift acknowledgements should include the date paid, the name of the charity, and the amount of the payment.
A hallmark of the Balentine legacy for the past 30 years has been an emphasis on community service. As a wealth management firm, our goal is for our clients’ hard-earned dollars to make the most meaningful impact possible in the organizations about which they are most passionate. Part of this includes finding the most tax-efficient avenues for gifting. Please contact your Balentine relationship manager with any questions about charitable giving.