When you have achieved enough to cover your needs, you start to look at ways you can have an impact beyond your immediate family. In this article, we discuss strategies on charitable giving.
Establishing a Lasting Legacy
Charitable giving isn’t just about giving to get a tax deduction, although that is a side benefit; it’s aligning your money with your values and where you want to leave an impact.
- Donor-Advised Funds (DAFs): The benefit of DAFs is you can donate a significant part of your assets today, receiving the tax-deduction now, and then distribute the funds to charity over time. While you are deciding where to send the funds over the years, the funds can be invested and grow tax-free inside of the DAF. This would be advantageous during a high-income year, such as selling your business. You can front-load your charitable contributions to offset the high income, and then actually distribute the funds over time. In addition to this, you can also donate appreciated securities. Think of apple stock you bought 20 years ago that now has a $500,000 capital gain if you were to sell it, potentially costing you $100,000 in capital gain taxes. Rather than selling the investment to then donate the funds, you could move it to a DAF and distribute it tax-free. Keep in mind that this decision cannot be reversed. It’s important to make sure your own financial needs are taken care of before committing a large amount to a DAF, in the event you might end up needing the money back someday.
- Private Foundations: Establishing a private foundation allows you to create a lasting legacy by managing your charitable activities directly. It can provide benefits such as asset protection and tax benefits. It is also costly to set up, has ongoing expenses that need to be maintained, and has a lack of flexibility. There is a fine line between creating a private foundation out of the goodness of your heart and stroking your own ego. I am not accusing anyone of this but if we are being honest, it’s very tempting to let the recognition of setting up your own foundation, especially in your own name, cloud your charitable giving strategy.
- Charitable Remainder Trusts (CRTs): CRTs allow you to provide income for yourself or beneficiaries during your lifetime with the remaining assets going to charities of your choice. This strategy combines benefits for retirement planning, estate planning, tax planning and charitable planning all-in-one. It’s also important to tread carefully here as this is an irrevocable decision.
Charitable giving can be a way to leave behind a lasting impact and purpose. With strategic planning, you can have a positive impact on not only many aspects of your own financial plan, but also impact the lives of others.
