Nicholas J. Pino is an Investment Advisor with Capitol Financial Solutions in Raleigh.
What’s the best way to give to a charity?
It depends on what you’d like to achieve. Are you giving because you think it’s the right thing to do, because you want to create a legacy or because you’re following a family tradition? Are you looking to minimize taxes or is being charitable to Uncle Sam acceptable? Do you want convenience or complexity?
Consider your gift an investment, because that’s what it is. You’ll want to give it to a charity in a way that provides the best return – even if the only return you’re seeking is personal satisfaction.
Among the methods for giving to charity are the following:
Cash. A gift of cash or property is the simplest way to give and is most appropriate for relatively small contributions. Your contribution will be tax deductible, as long as the Internal Revenue Service has granted the charity 501(c)(3) status.
Charitable Remainder Trusts. A charitable remainder trust (CRT) or charitable remainder annuity trust (CRAT) is especially useful for a gift of assets that have appreciated in value, such as stocks or real estate. By donating the assets to a CRT, you can exempt them from capital gains taxes. The donor also receives an income tax deduction equal to the value of the donated asset. Because the assets are removed from the person’s estate, estate taxes are also reduced. And finally, the donor typically receives an income stream for life. When the donor dies, the charity receives whatever funds remain in the trust.
CRT and Life Insurance. The income from a CRT can be used to purchase life insurance as a benefit to your heirs or to provide an exit strategy if you own a business. If ownership of the policy is assigned to an irrevocable trust, the death benefit will not be subject to estate taxes. To pass on the assets of a family business, the parents leave the business assets to the charitable organization, but require the charity to exchange the assets for the death benefit from the life insurance policy.
Charitable Lead Annuity Trusts. The charitable lead annuity trust (CLAT) provides lifetime income to the donor and does not benefit the charity until the donor dies. A CLAT can provide income to the charity until a designated date, then the remaining funds go to the donor’s beneficiaries.
Charitable Giving Funds. A charitable giving fund is ideal if you’d like to make many small gifts to different charities, rather than one big gift to a specific charity. A fund manager is given the responsibility of distributing assets according to your wishes to the charities you name.
A charitable giving fund has two important advantages. It will reduce your administrative burden, since all donations can be handled through a single fund, and it will create immediate tax advantages. Since the fund itself is a charity, you will be able to take an income tax deduction for your entire contribution immediately.
Before choosing a fund, review fees, the choice of where your assets can be invested until they are donated, and any restrictions on donations.
Endowed Funds. The donor’s gift is invested and earnings from the gift help the charity. The institution to which funds are donated usually matches the gift, leveraging your donation. The tax benefits are like those from a CRT, but the donor receives no income.
Foundations. Forming a private foundation can give high-net-worth individuals control over how to manage and dispose of assets. Wealthy donors often prefer to use a foundation because it gives them an opportunity to see their gifts put to use during their lifetime. However, foundations are expensive and time consuming to establish and administer, and a federal excise tax is charged on gross investment income.
Supporting Organizations. Supporting organizations are similar to private foundations, but they are public. As public charities, their investment income is not subject to the federal excise tax.
As these examples show, there are many ways to donate to a charity and some of them can be very complex. Before deciding where and how to give, seek advice from your financial advisor, accountant or attorney to determine which option is best for you.
“This article appears courtesy of Nicholas J. Pino. It is for informational purposes only and is not intended to replace the need for independent tax, accounting, or legal review. Individuals are advised to seek the counsel of such licensed professionals concerning how these tax advantages, if any, may apply to your specific circumstances. Offering John Hancock Insurance Products. Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered Investment Advisor. 8816 Six Forks Road, Suite 301, Raleigh, NC 27615 (919) 546-0400 201-20130306-135065.”