Developing The Best Charitable Giving Strategy

What is the best strategy to achieve your charitable giving goals?


That question makes some generous people feel uncomfortable. But considering things like long-term charitable giving budgets, estate planning, and tax ramifications doesn’t make your gifts any less genuine. In fact, a comprehensive giving strategy can help you and your heirs make a sustainable impact on the causes that are most important to you.


Moreover, basic cash contributions are often not as advantageous to givers as they used to be. Recent changes to tax code mean that unless your charitable donations put you above the 2021 standard deduction amounts of $12,400 for individuals or $24,800 for married couples filing jointly, your tax bill won’t be affected.


Folks who do have higher giving ambitions often choose to form either a private foundation or a donor-advised fund. Let’s take a look at some of the pros and cons of each.


Private Foundations


A private foundation is a 501(c)(3) nonprofit organization that can be set up by an individual, a family, or a corporation. The foundation is typically funded by a large initial donation and then subsequent donations from individuals and businesses that are managed by the foundation’s trustee. Tax deduction limits for foundations are 30% of adjusted gross income (AGI) on cash, and 20% of AGI on securities and other assets such as real estate.


There are two types of foundations:


  • Operating Foundations are required to spend 85% of adjusted net income or minimum investment return, whichever is less, directly on tax-exempt charitable activities.


  • Non-Operating Foundations make donations to other charitable organizations out of their assets.


The amount of structure and administration required to run a private foundation almost resembles a business. On the one hand, that means a well-run foundation can be a lasting part of your family’s legacy. On the other, that means foundations can be expensive to set up and manage. Operating foundations are also subject to IRS tests in order to maintain their tax-exempt status.


Donor-Advised Funds


For families that don’t want to deal with the hassle or the expense of running a foundation, a donor-advised fund could be a better choice. These are private charitable investment accounts that are managed by a 501(c)(3) sponsoring organization. Donor-advised funds can be set up quickly at little-to-no expense and usually have very minimal annual operating fees.


Many financial institutions have charitable arms that can manage donor-advised funds for their clients. Cash, securities, real estate, and other assets can be donated to the fund and appreciate tax free. Donor-advised funds also have higher tax deduction limits than foundations: 60% of AGI for cash, and 30% of AGI for securities, real estate, and other assets. Transferring assets to a donor-advised fund can also help folks reduce their capital gains tax liability.


The tradeoff for the ease of a donor-advised fund is that you are only able to make recommendations about which charities you want to receive your donations. Ultimately, the sponsoring organization has the final say. However, this can also be a positive, especially once your kids, grandchildren, and other heirs are more involved with the fund. The sponsoring organization’s due diligence will weed out potential fraudsters and make sure that your donations go to legitimate charitable organizations.


Balancing issues of financial control, administrative ease, and tax planning is essential when considering a donor-advised fund or a foundation. After weighing all the options and discussing your charitable mission with your family, it could be that simpler strategies, like ongoing cash donations or volunteer work, will offer a greater Return on Life.


Let’s discuss your charitable giving goals for 2022 and beyond and how our Life-Centered Planning process can help you do the most good.

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Sister Emily Therese December 16 2021

Excellent suggestions -- as always!


Ogorek Wealth Management, LLC

Ogorek Wealth Management, LLC