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Charitable Giving – A Structured Approach (Extended Article)

Brendan • 2 years ago • Uncategorized

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Charitable Giving, A Structured Approach

By Claire Costello, David Ratcliffe, and Ramsay Slugg

Individuals who are committed to philanthropy are motivated by a desire to have a positive impact on the organizations and causes they support. Structuring their giving — by using a donor-advised fund, private foundation or charitable trust — can help them enhance that impact. Moreover, compared with direct giving, the use of one or more vehicles correlates with greater personal satisfaction and results in higher giving levels.

Donors give strategically

Today’s dedicated donors are using charitable giving vehicles as part of a more deliberate and intentional charitable strategy that better allows them to integrate their giving with their broader wealth management strategy. The 2014 U.S. Trust® Study of High Net Worth Philanthropy indicates that the use of charitable giving vehicles is on the rise. Research found that more than half of wealthy donors use or plan to use a charitable trust, private foundation or donor-advised fund to make their gifts.

Structured charitable giving benefits both donors and recipients. Giving in a structured way allows donors to make charitable decisions proactively, rather than reacting to individual appeals. Structured giving may target specific organizations, focus on specific needs, or both. The use of charitable giving vehicles may also allow donors to better monitor the impact of their giving over time while seeking to maximize tax and financial benefits.

Moreover, charitable giving vehicles offer the opportunity to involve children and grandchildren in the charitable gifting or granting process. By structuring giving, families can help build and enhance a family legacy of philanthropy, allowing donors to pass along values along with their assets to younger generations.

Structured giving offers a landscape of solutions

Donors may structure their charitable giving with as much or as little complexity and control as they choose. While direct charitable giving may have the advantage of simplicity as compared to the use of charitable giving vehicles, structured giving may also provide distinct advantages. Many donors find that a combination of approaches is needed to help meet their philanthropic and financial goals.

Selecting the giving vehicle that is appropriate for a particular individual or family depends on many factors, including family culture and traditions, tax structure, income needs, whether they monitor their giving and assess their impact, and the type of assets being donated.

Three broad categories of charitable giving vehicles:

1. Indirect Charitable Giving Vehicle

With indirect charitable giving, the donor gives assets to a charitable entity, such as a private foundation or donor-advised fund, which in turn makes charitable grants to operating charities.

2. Split-interest Charitable Trust

Assets donated to a trust are used to benefit both the donor and the charity.

3. Institutional Giving

Many nonprofits offer their own charitable giving vehicles that may provide income to donors or their beneficiaries, as well as benefit the charity.

Indirect Charitable Giving

Donor-Advised Fund

Individuals and families who are looking for a simple giving vehicle may find a donor-advised fund (DAF) appropriate for their giving needs. A DAF is a nonprofit organization established with community foundations, certain financial services providers or other charitable organizations. The donor gifts cash, securities or other assets to the DAF and then receives an income tax charitable deduction for the current year.

With the gift, the donor establishes an account in the DAF that can be named as the donor wishes. This offers the opportunity to include family members in charitable giving. The account is managed by an investment professional who seeks to grow the assets. Returns on the investment can further enhance the value of the gift to charity.

The DAF makes grants to charities based on the donor’s recommendations. All grants must be approved by the sponsoring organization of the DAF. Grants can be made at any time, and there are no annual distribution requirements, as there are with private foundations.

In addition, granting can be done anonymously to protect the donor’s privacy, a benefit not fully afforded in other giving vehicles. DAFs may be established with community foundations, certain financial services providers, or other charitable organizations that sponsor them.

Private Foundation

Those who intend to donate significant amounts while creating a charitable giving program for future generations may wish to consider a private foundation. Foundations are nonprofit legal entities that make charitable grants. The donor retains full decision-making authority over granting.

Private foundations involve costs to establish, and their grant making activity is a matter of public record. Generally, 5% of a foundation’s assets must be granted each year. In addition, foundations are required to file tax returns and pay an excise tax of up to 2% of net investment income.

The donor receives an income tax charitable deduction for assets that are contributed to the foundation. The assets are typically invested to generate additional funds for future grants. The donor has the flexibility to choose how the investments are managed.

Key questions to consider when choosing an indirect charitable giving vehicle:

  • Are you interested in formalizing your legacy?
  • Would you like to create a forum for engaging family members?
  • Would you like to establish or continue family traditions?
  • How much control do you want to have over investments
  • and grant-making?
  • How costly — both in terms of time and money — is it to establish and maintain the vehicle?
  • Are there required annual distributions?
  • Can you give anonymously?

Structured giving offers a landscape of solutions

Donors may structure their charitable giving with as much or as little complexity and control as they choose. While direct charitable giving may have the advantage of simplicity as compared to the use of charitable giving vehicles, structured giving may also provide distinct advantages. Many donors find that a combination of approaches is needed to help meet their philanthropic and financial goals.

Selecting the giving vehicle that is appropriate for a particular individual or family depends on many factors, including family culture and traditions, tax structure, income needs, whether they monitor their giving and assess their impact, and the type of assets being donated.

Structured giving through a split-interest charitable trust

Charitable Remainder Trust

Donors who wish to generate income from an asset while ultimately gifting it to charity can establish a charitable remainder trust (CRT). This type of structured giving vehicle is particularly advantageous for highly appreciated assets. The donor contributes the asset to an irrevocable trust — one in which the terms of the trust cannot be amended or revised until the terms or purposes of the trust have been completed — and names the charity or charities that will ultimately benefit. The donor can claim an immediate income tax charitable deduction for the value that will ultimately pass to charity, and can defer the payment of capital gains taxes on the appreciation. The donor or other beneficiary receives specified distributions from the trust, either for a specific number of years or for their lifetime. At the end of that term or the beneficiary’s life, the remaining assets pass to the charity that the donor has named.

Charitable Lead Trust

Donors who wish to provide income to charity while ultimately transferring assets to younger generations can establish a charitable lead trust (CLT). Depending on how the trust is structured, the donor may be able to remove income and future appreciation on an asset from his or her estate without permanently relinquishing management of the asset. A donor contributes assets to an irrevocable trust and, depending on the structure of the trust, may be entitled to an income tax charitable deduction. For a set term of years, or the duration of the donor or other beneficiary’s life, the trust pays an annual amount to one or more charities named by the donor. At the end of the payment term, the remaining assets will pass to the donor’s beneficiaries, typically their children or grandchildren.

Key questions to consider when choosing a split-interest charitable trust:

  • Who do you want to receive the income during the term of the trust?
  • Who do you want to receive the asset at the termination of the trust or the donor’s death?
  • Are contributions tax-deductible?

Structured Endowment

A donor giving to an institutional endowment may or may not restrict its use. This is an outright gift to a charitable organization for which the donor receives an income tax charitable deduction. The donor retains control by placing restrictions on when and for what purposes the funds may be used.

Charitable Gift Annuity

Some charitable organizations offer a source of income for donors through a charitable gift annuity. This is a contractual agreement between the donor and the institution in which the donor contributes assets and the charity promises to pay a lifetime annuity to the donor or another individual of the donor’s choosing.

The amount paid through a charitable gift annuity is typically less than what can be expected from a commercial annuity, because a portion of the amount contributed ultimately goes to charity. However, by making a gift, the donor receives both an income and estate tax charitable deduction. The charitable annuity also allows the donor to reduce the size of his or her taxable estate.

Pooled Income Fund

Another way for donors to access income is through a pooled income fund. These are funds run by nonprofit organizations, in which donors’ contributions are pooled and invested together. Income from the fund is distributed to each participant according to his or her share of the fund. Upon the death of the income participant, the remaining assets are retained by the designated nonprofit organization.

Key questions to consider when giving through a charitable organization:

  • How much control do you want to have over how your gift is used?
  • How much income do you want your gift to generate?
  • Are you sure of your long-term commitment to the particular organization?

Direct giving: advantages and considerations

Most people give directly, without the use of a giving vehicle, to the organizations and causes they wish to support. This approach is straightforward and uncomplicated. Donors receive an immediate income tax charitable deduction, they are not committed to make repeat gifts, and they can give as quickly as they can write a check or transfer stock. Often, however, direct giving is reactive rather than proactive. And if the direct giving is solely based on solicitation, donors may not feel as connected to the recipients of their gifts as more consistent supporters do. As donors become more focused in their philanthropy, they may wish to make a longer-term impact on a particular issue. And as the complexity of a donor’s financial situation evolves, it may make sense to consider more structured ways to give.

Choose the right team and the right approach

By moving from direct giving to structured giving, you can provide more consistent and meaningful support to the organizations you care about. Structured giving offers greater personal satisfaction by deepening your connection to the causes you value. Taking a strategic approach allows you to integrate giving into your overall wealth management and estate strategy.

Other potential benefits of structured giving include:

  • Creating a legacy of charitable giving by involving your family in your philanthropic efforts.
  • Donating appreciated securities may help you minimize capital gains taxes and help reduce the risk of holding a concentrated stock position.
  • Philanthropic planning may reduce the size of your estate and the resulting estate tax liability.

Various giving vehicles might be appropriate, from the simple to the complex, with various levels of control.

About the authors

Claire Costello is National Philanthropic Practice Executive of Philanthropic Solutions, U.S. Trust

David Ratcliffe is Managing Director, Philanthropic Solutions, U.S. Trust

Ramsay Slugg is Managing Director,Wealth Planning Solutions, U.S. Trust

Thanks to Merrill Lynch, Bank America Corporation, for allowing us to share this article with you.

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