Getting involved in philanthropy may start with a tug at the heartstrings, but a good dose of strategy allows donors to make the biggest possible impact on the causes that matter most to them. And for the charitably inclined, advanced giving strategies can foster not only difference-making generosity but also provide tax advantages that support
Getting involved in philanthropy may start with a tug at the heartstrings, but a good dose of strategy allows donors to make the biggest possible impact on the causes that matter most to them. And for the charitably inclined, advanced giving strategies can foster not only difference-making generosity but also provide tax advantages that support a donor’s overall wealth management.
“If someone wants to give, they can do so in a tax-efficient manner, which allows them either to get more dollars in their pocket or – and this is what I get really excited about – they could actually end up giving more effectively to the charities that they care about,” said Jonathan Raymon, vice president and charitable solutions strategist for Baird Trust.
One of the fastest-growing strategies is to give through a donor-advised fund, a method that has garnered popularity for its potential to maximize a donor’s impact while mitigating their tax burden.
DAFs are individual giving accounts through which donors can deposit and then donate their assets, such as cash, stock and other publicly traded securities, to the charities of their choice. The funds are managed by a sponsoring public charity, which conducts due diligence to ensure the donor’s recommended gift goes to qualified nonprofits.
“You can liken it to a charitable checking account,” said Angela Krause Lane, a director with the Johnson Kellogg Lane Group in Baird’s Oconomowoc and Waukesha offices.
The recommended initial contribution to a DAF is around $25,000, though some DAFs offer no minimums.
One of DAFs primary benefits is they allow donors to receive an immediate tax deduction and then grant the charitable funds over multiple years. While the current standard deduction removes the benefit for most taxpayers from itemizing their charitable gifts, a DAF allows donors to instead “bunch” multiple years’ worth of donations in a single year.
“Someone who might give $10,000 a year in charitable contributions that isn’t able to take those as itemized deductions might just bunch (three years of giving) into one year; they can still give that exact same amount and do so much more efficiently,” Raymon said.
“What it ultimately allows them to do is put the money into the donor-advised fund now, get the tax benefit, but they don’t have to give it away right away. You can give it away over time,” Krause Lane added.
Some donors may want to give to a DAF in a year when they see a spike in income following an event such as a large bonus or a company stock award, she said.
[caption id="attachment_579659" align="alignleft" width="300"] Chris Ponteri[/caption]
Those who find themselves in concentrated stock positions could find relief in contributing part of them to their DAF. Rather than selling the securities and donating cash, this maneuver eliminates capital gains tax on the sale of the stock. Among recent giving trends, Chris Ponteri, financial advisor and trust officer with Wealth Enhancement Group’s Brookfield office, said he’s seen an increase in clients transferring appreciated stock to DAFs.
Charitable dollars directed to DAFs can potentially grow tax-free, with many sponsoring organizations offering investment options for those funds.
A 2022 report from the National Philanthropic Trust found grants from DAFs to charities grew by more than 400% over the past decade. Raymon credits a growing awareness of DAFs with the surge in popularity.
“(Donor-advised funds) haven’t been around all that long; we’re talking just in the past few decades that they have even existed. So, when you talk about a new offering like a donor-advised fund, it takes a while for word to get out, and now I think we’ve gotten to a point where there is critical mass, that people know that this is an option and they are starting to see why this might make sense for them,” he said.
Donors considering a DAF should be mindful that a commitment to the fund cannot be returned to them or used for any other purpose, he added.
“Once the dollars are given to the donor-advised fund, those are irrevocably given. That is a completed gift; at some point in the future, it has to go to charity,” Raymon said, adding DAFs therefore may not be right for donors who are worried about fluctuations in their income over the next couple years, for example.
“It wouldn’t be right for everyone,” she said. “But for anyone who’s saying, ‘I know I’m charitably inclined, I want to give those dollars in the future,’ it makes a whole lot of sense to get some of those assets out, get a deduction up front and let those charitable dollars grow within the donor-advised fund tax-free.”
Other options
Donors who want to take a more active role in their philanthropy might consider establishing their own private foundation.
While DAFs and private foundations share similarities as charitable giving vehicles, a few key differences could make the latter more strategic for some, particularly high-net-worth individuals.
Advantages of private foundations include the level of autonomy a donor maintains, the wider array of assets that can be used to fund the foundation, and the variety of activities and organizations that can be supported through a foundation.
With a foundation, a donor is able to have complete control of their philanthropy and branding; on the flip side, they also take on the administrative burden of running their own freestanding organization. DAFs favor ease, while private foundations favor ongoing involvement, said Raymon.
But with more control, donors have more avenues for giving. Unlike DAFs, private foundations are able to support organizations based outside of the U.S., make grants directly to individuals and run their own scholarship programs.
“I’ve had clients that have specifically considered these two options and went with the private foundation because that was important to them,” said Raymon.
Donors with posterity in mind may also appreciate knowing their family can maintain control of the foundation for generations to come.
“If we want to set up future generations and train them in that love of philanthropy and involvement in the community, we can make sure those future generations become the leaders in their community and can take a prominent role in working together with other nonprofits,” Raymon said.
Meanwhile, those preparing to sell a business, farm or piece of real estate are in a position to consider a third giving option – charitable remainder trusts – as part of their exit strategy.
CRTs allow individuals to donate assets to charitable causes and receive a predictable stream of income for a specified period of time. Advantages of this approach include an immediate tax deduction in the year of funding and the deferral of taxes on that capital gain until the distributions are paid out.
“It might be someone who still needs the income; they don’t want to just give away the asset completely, they want the security … but also, to be able to get an immediate tax deduction up front, as well as being able to defer a lot of that (capital) gain,” said Raymon.
“Both (donor-advised funds and charitable trusts) are great ways for charitable giving,” said Ponteri. “A donor-advised fund gives you the flexibility to make gifts over a period of years while getting the tax deduction up front. ... There are two main kinds of charitable trusts, and both have several advantages, including providing a current income stream to the donor and a potential income tax savings by donating a highly appreciated asset to the trust.”
Regardless of the route they choose, donors should be proactive about having conversations with their wealth advisors to establish their philanthropic goals and make a plan to achieve them, experts say.
“I have many clients who have been very successful in their careers, and, at the same time, they have prioritized charitable giving,” Ponteri said. “I am not sure a lot of people realize how much money highly successful and wealthy individuals are giving to charities. For many of them, supporting the causes they care so much about is just as important as earning money. Many of these individuals have donor-advised funds or foundations and use these as part of their overall financial planning.”
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