Last year, Americans gave over $260 billion to charity, but if you’re like most, you probably made a donation in a year–end flurry of check–writing. If that’s the case, you’re not reaping all the financial benefits of your charitable gifts. All too often, donors fail to realize that details, such as the specific asset and when it was given, are vitally important to their long–term financial strategy.
DECIDE WHAT TO GIVE As a donor, you should first take careful inventory of your holdings, including real estate and personal property, such as artwork, stocks and bonds. If sold, these assets will result in different realized capital gain depending upon the applicable capital gains rate and how long the assets have been held. If donated to charity, they can generate different charitable income tax deductions depending upon the type of asset, the charity to which the asset is donated and whether or not the charity can put the asset to related use. That’s why it’s important to consult your financial advisor and tax attorneys to determine the best asset to donate in order to satisfy your financial situation.
The government encourages charitable giving through income, gifts and estate tax deductions, as well as other tax code provisions, such as the ability to create charitable remainder trusts, gift annuities, pooled–income funds, private foundations and donor advised funds. These strategies enable individuals to maintain flexibility and legal control over their assts while participating in charitable giving. Choosing the right strategy depends on your philanthropic goals, as well as your overall financial objectives.
SUPPORT YOUR CAUSE THROUGH DONOR–ADVISED FUNDS Donor advised funds, which are essentially a charitable gift foundation, are becoming increasingly popular because they provide an immediate tax deduction and allow a donor to recommend how much to donate, which charity to donate to and when to distribute the assts. The donor can also name other fund advisors (such as a spouse or children), which is particularly beneficial if you wish to establish a lasting legacy of giving.
Donor–advised funds can also prove strategic by continuing tax benefits each time you contribute to the funds because you can vary the size of your donations through the years in order to maximize the benefits as you need them. Then, when you’re ready, you can decide how much to give to which charity, as well as when you will recommend that the grants from the donor–advised fund be distributed.
Merrill Lynch enables donors to create and contribute to a flexible donor–advised fund through the Merrill Lynch community Charitable Fund. Gifts can be targeted to local and national charities alike, giving donors the added benefit of portability. For example, if you create a fund with a participating community foundation in one jurisdiction, you are not limited solely to making grants in that location. You can recommend grant distributions to any qualified nonprofits in their country. That’s a big plus, particularly for younger, more mobile donors because their philanthropy can follow them wherever they go.
KNOW ALL YOUR GIVING OPTIONS If you prefer even greater control over your donations, a private foundation may be a better option for you. However, a foundation requires expert tax and legal advice to set up and operate, and it is subject to far greater government regulatory scrutiny than a donoradvised fund.
Other strategies can also provide significant benefits. For example, a charitable remainder trust can allow you to receive income and estate tax deductions for your donations, as well as the distributions from the trust over a set period of time, which is often your entire life. Although you will pay income taxes on the distributions received from the trust, the trust’s assets will still become tax–free. The distributions you receive may even be tax favored, in for the form of returned principal. When the set time expires, the remainder goes to your designated charity or charities.
When done properly, philanthropy can benefit both the charitable organization and the donor. The key to making this happen is simple: plan ahead. A financial advisor can work with you and your tax advisor on a strategy to help you reach your philanthropic goals while still meeting your personal financial needs.
