While you could give cash to a cause you care about, it may not be the most financially savvy way to make an impact. Instead, putting your money and assets into charitable investment funds can lead to long-lasting effects on the revenue for a qualifying cause.
What are charitable investment funds and why should you look into one?
For a comprehensive look at how you can make your generosity count, this guide will walk you through what you need to know to invest wisely.
What are Charitable Investment Funds?
When you want your money to work harder while benefiting a meaningful cause, you may opt for charitable investment funds over traditional investment funds. What is the primary difference between these two investment vehicles and how can you maximize your giving?
A traditional investment fund allows you to invest your money for your future use. The goal is to create a sustainable financial benefit, but it’s only focused on growing your wealth for retirement, long-term goals, and rainy days in the months and years to come. You have total discretion over when and how to spend money that is invested here.
On the other hand, a charitable investment fund allows you to place those funds into an account that will ultimately benefit the greater good via the charity of your choosing. With the money in the fund, donors can reinvest those funds in a tax-advantaged way to grow the initial seed money and support their overall purpose and mission.
Types of Charity Investment Funds
There are no cookie-cutter approaches to charitable investment funds. There are many ways to include charitable giving in your estate planning, and most of the charitable giving done through these funds will fall into four different categories. Take a closer look at which funds might be the most strategic move to maximize your giving.
- Charitable remainder trust (CRT): This type of charitable investment fund is a great option because it secures a recurring source of income for you or a beneficiary as well as ultimately helping the charity of choice. In one move, you can donate cash or assets to a CRT for tax deductions and benefits now as long as a minimum of 10 percent gets distributed to charity in the end.
- Donor-advised funds (DAF): When you are positive that charitable giving is the route you want to take, a donor-advised fund gives you flexibility to give as you see fit. You take a tax deduction right now and can contribute multiple times over the years ahead. Money grows tax-free in the DAF until you decide where and how to donate it.
- Endowment funds: Endowment funds are designed to generate revenue for charity. To do so, the money you donate is invested and distributions are given to the charity while leaving the principal intact for future distributions. Like other charitable investment funds, donations to an endowment fund are tax deductible.
- Socially responsible investment funds: If you want to make an impact in one particular area, then you might want to consider socially responsible investment funds. These allocate your funds to a specific area that is geared toward social or environmental change. Businesses have more working capital and you get a source of income from the distributions of successful investments.
Benefits of Charitable Investment Funds
Why should you decide to give to charitable investment funds rather than more traditional forms of investing your money? Here are three top reasons why you may benefit from giving to the greater good.
Support Your Favorite Cause
Most people can name at least one cause that is near and dear to their heart whether that means a charity or their alma mater. The goal is to create a legacy and make a substantial impact on the work that that organization is doing in your community and the world at large. A charitable investment fund typically has a greater impact than simple cash donations.
Generate Income
Depending on the type of charitable investment fund you donate to, you could also generate a source of income for you or your beneficiaries. Charitable remainder trusts can be the right move if you want to generate recurring revenue for beneficiaries. Just keep in mind that you have to give a minimum amount to charity (10 percent).
Tax Advantages
Lower your tax liability to the IRS at the end of the year by donating to charitable investment funds. First, you can take a tax deduction in the year that you donate to the fund. This lowers your overall income for the year which means you pay less out of pocket on your filings at the end of the fiscal year.
Keep in mind that there are some limits on the deductions you can take in vehicles like charitable remainder trusts. The amount you can deduct depends on your adjusted gross income, ranging from 30 to 60 percent of your AGI.
Second, you can eliminate capital gains taxes by donating assets to the investment fund. If you were to sell your assets outright and donate the proceeds to charity, you would need to pay the capital gains tax on an appreciated asset. On the other hand, charitable investment funds can sell the asset and take the full value of the sale without paying capital gains, maximizing your gift.
Plan Your Charity Investment Funds with Magellan
Are you thinking about making a sizable donation to charity and want to maximize your gift for both tax purposes and for the cause near and dear to your heart? Magellan can help you with our comprehensive estate, financial, legal, and tax planning process. We can help you set up the best vehicle for your charitable goals, such as a charitable remainder trust or donor-advised fund.
Contact us today to meet our expert team and discover how we can support your charitable giving now and into the future!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.