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When charitable giving is an integral part of a total wealth plan, donors enjoy significant tax savings while supporting a worthy cause. In order to maximize the value of your charitable donations, as well as the value of any assets you wish to transfer to your heirs or other beneficiaries, you must first choose the correct vehicle for your charitable giving. While donor-advised funds tend to be the simplest and easiest ways to give, charitable trusts and private foundations can also be very effective. Let’s take a look at the benefits of all three types of charitable vehicles.

What is a Donor-Advised Fund?

A donor-advised fund is a simple vehicle allowing a donor to make a contribution of cash or appreciated securities to an account. The donor can continue to control how the funds are invested and make on-demand grants to one or more nonprofit organizations. Donors are typically able to make their contributions anonymous, and enjoy some flexibility in recommending grants to qualifying public charities. Contributions to a donor-advised fund are irrevocable.

The benefits of giving to a donor-advised fund include:

  • Donors may be eligible for an immediate deduction of 30 percent of their adjusted gross income for contributions of securities, and a maximum of 50 percent for cash contributions.

  • Gifts of long-term appreciated securities, such as stocks, bonds, mutual funds, and real estate, avoid the capital gains tax in addition to receiving an ordinary income tax deduction.

  • Donor-advised funds can accept many different types of assets.

  • Donors can name their successors to ensure the family remains involved in the fund.

For high-net-worth individuals, a donor-advised fund is a simple, easy way to make charitable contributions, either in a lump sum or installments, according to their own timetable, and avoid the administrative and legal expense of running a charity.

What is a Charitable Trust?

A charitable trust is a trust in which a donor’s assets are held by a third party (the “trustee”) who distributes income toward one or more charities. Charitable trusts come in two basic versions, lead and remainder, the main difference between the two being the timing of donations and the transfer of assets to non-charitable beneficiaries.

Charitable Lead Trusts

A charitable lead trust makes a donation to a charity for a set period of time, after which the donor’s heirs (or “remainder beneficiaries”) receive whatever is left. One of the major benefits of a charitable lead trust is it minimizes gift and estate taxes on the assets that are transferred to the donor’s heirs. Donating a portion of the trust’s income to charity reduces the remaining taxable income of the beneficiaries.

Charitable Remainder Trusts

A charitable remainder trust is typically funded with highly appreciated assets, such as stocks, bonds, mutual funds or real estate, and pays an income to you the donor or other non-charitable beneficiary for a set period of time. When that time period ends, the remainder of the trust, including any appreciation, is donated to the charity or charities you select. The benefits of establishing charitable remainder trust include the tax deduction that comes with donating assets to that trust and the ability to sell assets within the trust without having to pay capital gains taxes.

A charitable trust is irrevocable, meaning that once it is set up, it cannot be changed by the grantor. A revocable trust, also known as a living trust, is more flexible, but unlike a charitable trust is subject to estate taxes during your lifetime.

What is a Private Foundation?

A private foundation is a more complex entity for charitable giving, in that it involves creating a nonprofit organization, with a board, trustees, and directors, which must adhere to federal laws and IRS requirements which determine nonprofit status. Private foundations are created through a single, major donations from an individual or corporation, and typically provide grants to public charities. Private foundations are not supported by funds from the public.

Given the complexity and time involved in running a private foundation, it is, generally speaking, not the ideal vehicle for charitable giving by a high-net-worth individual or business owner.

Charitable Planning for the High-Net-Worth

Besides providing an opportunity to support a worthy cause, the benefits of charitable giving are many, including the obvious savings in taxes. It is important to seek the guidance of a wealth-planning professional to ensure your charitable giving aligns with your unique financial needs and wealth goals. AltruVista provides expert advice to high-net-worth individuals who seek to integrate their giving into a total wealth-planning process. Contact us to learn how to get the most out of giving.

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