By making charitable donations to support the organizations and causes we care about, the hope is that we can make the world a better place and potentially build a legacy that reflects our values for future generations.
If you feel compelled to support charitable causes, as many of us do, strategic giving should be part of your overall financial plan. Strategic philanthropy involves aligning your long-term financial interests with your desire to do good in the world.
Contributing directly to charitable organizations is the easiest and most common way to give. However, it may not be the most efficient in light of your overall financial picture. There are several other tax-efficient methods for charitable giving that may help you maximize the impact of your charitable donations.
Charitable gift annuity
A charitable gift annuity is a contract established between a donor and a charity. With a charitable gift annuity, the donor is able to transfer assets to a nonprofit organization for investment. In exchange, the donor receives a partial tax deduction and a fixed income stream that lasts for the donor’s lifetime or for the lifetime of the donor’s beneficiary. When the donor or the beneficiary dies, the charity keeps what’s left of the gift.
Charitable gift annuities are generally not as flexible as other giving options. For example, it is not possible to change charities, and you can’t give to multiple charities with a single donation.
Charitable remainder trust (CRT)
A CRT is an irrevocable trust that allows you to split trust assets between charitable and noncharitable beneficiaries. With a CRT, you or your beneficiaries will receive annual distributions for a stated number of years or until you or your beneficiaries die. At that time, any remaining assets are passed to the charities that you named in the trust.
CRTs may make sense for individuals who want an immediate partial tax benefit and need an income stream either for themselves or their beneficiaries. However, it is important to keep in mind that CRTs require legal setup and have ongoing administrative costs.
Charitable lead trust (CLT)
Like a CRT, a CLT is an irrevocable trust. But unlike a CRT, a CLT generates an income stream for one or more named charities, with the remaining trust assets eventually returned to you or distributed to your beneficiaries after a specified number of years. Like a CRT, a CLT also provides the donor with an immediate partial tax benefit.
Donor-advised fund (DAF). With a DAF, you make an irrevocable contribution to a sponsoring organization to create a fund from which charitable grants can be made. Contributions to DAFs typically include cash, stocks, or non-publicly traded assets such as real estate, private business interests and private company stock. DAFs are eligible for an immediate tax deduction.
Although the donor can make recommendations about how to invest trust assets and which charities to donate to, the sponsoring organization has ultimate control over investment and grant-making decisions.
Private foundations are independent charitable organizations generally established by an individual or family through a substantial initial contribution. Private foundations can be funded with almost any type of asset, including private equity, tangible assets, real estate and intangible personal property. With a private foundation, donors have complete control over grant-making and investment decisions, which includes the ability to engage in a wider range of philanthropic activities not available through other giving vehicles, such as grants to individuals and scholarship programs.
A private foundation allows you to establish a legacy that extends beyond your lifetime. In addition, family members can be employed by the foundation or serve as trustees or board members, which makes private foundations the ultimate family gift planning vehicle. However, compared to a DAF and other charitable giving vehicles, private foundations are costly and administratively much more complex, requiring legal setup and ongoing administration, including annual filings and reporting.
Before pursuing a charitable giving plan, it is important to consider the financial and tax implications. A qualified financial advisor, accountant or estate planning professional can help you determine the best charitable giving option for your situation.
Halsey Schreier is a senior wealth strategist for CIBC Private Wealth Management. In this role, he works closely with high net worth clients in New York, the Mid-Atlantic and the Southeast to provide integrated wealth management services, including comprehensive estate and financial planning solutions, multi-generational legacy planning and fiduciary administration for trusts and probate estates.
CIBC Private Wealth’s Wealth Your Way podcast series is an educational offering for clients and their children, and demonstrates our commitment to developing the rising generation.
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