Wealth may make life easier and trickle down to future generations, but it can also empower you to make a tangible difference in the world. Charitable organizations depend on donor generosity to fund their research and operations day in and day out. To make the greatest impact, you need a philanthropic strategy that creates waves of change while benefiting your bottom line in the here and now.
How can your donations make the most impact for the charities that are near and dear to you? Here are a few tips to help you plan your giving this year.
Define Your “Why”
The world can often feel like it is on fire, but it’s impossible to solve every problem that comes your way. Charitable giving can make a real impact when done the right way, but that starts with the right mindset.
Instead of trying to do everything, take some time to narrow down what you care about the most. Spend some time deciding on one to three areas that deserve your attention—and your donations.
With focused attention like this, the generous donations you build into your philanthropic strategy will better help your charity of choice achieve measurable results.
Shift from Cash to Complex Assets
Cash donations are often the simplest way to give to a charity of your choosing, but simple does not necessarily equate to effectiveness. Donating appreciated assets is generally more effective for the charity and has more tax advantages for you. While it may require more planning,appreciated assets will hold the key to more powerful changes.
Think about it this way: You invested in a stock years ago that has recently soared in value. If you were to sell that stock and donate the proceeds to charity, you would be subject to capital gains taxes that would eat into the sizable profit you could stand to gain.
In contrast, the charity can receive the appreciated asset, sell it, and avoid capital gains tax. They can leverage the full value of the stock for their mission. Meanwhile, you get to deduct the full fair market value of the assets from your adjusted gross income. It goes further this way and allows you to give more than cash donations alone.
Use a Charitable Vehicle
Instead of giving gifts at random, there are many ways to include charitable giving in your estate planning or philanthropic vision. Our favorites are charitable remainder trusts and donor-advised funds.
Acharitable remainder trust is an irrevocable trust that allows you to remove assets or cash from your estate. Inside the trust, those assets can be sold without capital gains tax or continue to grow until needed. Beneficiaries receive a regular income from the CRT for a set period or a lifetime,or both. Charities selected at the outset receive at least 10 percent of the trust remainder.
Adonor-advised fund presents another option for your giving. You can donate assets to the DAF and take a tax deduction for them (up to 60 percent of your adjusted gross income for cash or 30 percent for another type of asset). DAFs give you more flexibility to make recommendations for grants later on, while CRTs may require you to name a charity upfront.
Best yet, you don’t have to choose one over the other. In fact, they work strategically when used in tandem. You can name a donor-advised fund as the charity on your charitable remainder trust to take advantage of the benefits of a CRT while making recommendations for grants in the future.
Educate the Next Generation
If planning for a philanthropic strategy is important, make sure that you teach the next generation, too. Transfer values to your children and grandchildren, not just your valuables. Include key family members in your giving decisions to teach the next generation more about financial literacy and responsibility.
Education from an early age teaches younger generations to evaluate organizations, read financial statements, and understand the responsibilities that accompany managing wealth.
Measure the “ROI”
Never give money to any charity blindly. Research charities thoroughly and choose ones that are financially healthy, transparent, and efficient with their funds. Review annual impact reports to ensure that existing funds are achieving outcomes where it counts. This heavy lifting ensures your donation will make a real impact on your community and the world.
Don’t dismiss local charities as being too small to make a difference. Often, they operate on a lean budget that forgoes splashy campaigns in favor of doing the real work in their communities. Even smaller donations tend to go further when each investment is strategic and effective. Go and visit the charities that you give to, and better yet, volunteer there. This way you will really see where your dollars are going.
Instead of funneling money into inflated board member salaries, the funds tend to go toward sustained work. Your donation might only help cover minimal overhead at a national outfit, but a local charity could be powered for years by generous giving.
Time Your Generosity to Maximize Tax Efficiency
Tax bunching can work in your favor when funding your philanthropic goals. A year with unusually high income from bonuses, business sales, or Roth conversions can give you more money to play with at the end of the year. You can“bunch” several years of giving into a donor-advised fund in a single year to maximize your itemized tax deductions, while claiming your standard deduction in other years.
Another option might be to make QCDs in retirement to satisfy your RMDs without increasing the taxable income that can trigger a higher tax bill. This is one of our favorites because your required distributions completely circumvent your tax return.
Plan Your Philanthropic Strategy with Magellan
Are you ready to start plotting a course forward for your philanthropic aims? Magellan provides the comprehensive estate, financial, legal, and tax planning services you need to create a detailed strategy that accounts for your current and future financial situations. Don’t let another year go by without making an impact on your world.
Reach out to us today to schedule your meeting and discuss whether a charitable remainder trust is the right move for you!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group.