Philanthropic Giving

Leo Wealth

Establishing yourself as an individual who prioritizes philanthropic giving can be a significant milestone in life. As opposed to general giving, such as donating to the Red Cross during a disaster, you might be ready to start systematically giving to benefit charities or causes that are near and dear to your heart. Whatever your reason, you can do good things while also creating long-term legacy goals.

Despite the economic downturn, Americans gave a record $471 billion in 2020. Let’s take a step back to look at the potential reasons why. The Tax Cuts and Jobs Act (enacted in December 2017) increased the size of the standard deduction and capped the deduction for state and local tax. Because of this, several individuals and households no longer benefited from itemized deductions and took a standard deduction. In response to the pandemic, the federal government encouraged charitable giving by allowing taxpayers to take the standard deduction and an additional $300 deduction for actual charitable giving donated in 2020. The solid year-end finish by the S&P also likely impacted the increase in charitable giving.

Giving and taxes. There are many options, which one is yours?

In addition to taking an itemized deduction for your aggregated annual charitable gifts on Schedule A, there are several systematic strategies to consider. These strategies may save you money in the short term and allow you to potentially take that same money and put it back into the charity for both the short and long term.

Charitable Giving Options

  • Private foundations
  • Donor-advised funds
  • Charitable remainder trusts
  • Charitable lead trusts
  • Private placement life insurance in the form of an annuity.

Take the scenario of wanting to give back to your alma mater. One of those ways is endowing a chair that, for some schools, is a one to two million dollars threshold. Even if you don’t have the means to do so immediately, a life insurance option that gifts the amount at a future date allows you the enjoyment and satisfaction of endowing the chair in the present.

Other techniques available include charitable lead trusts and charitable remainder trusts. These techniques allow you to set aside money for yourself and for charity. For example, you could allocate a lump sum into a charitable remainder trust that is set up as an annuity stream, whereby you receive an income stream for a certain period of years (or until death), and the remaining funds pass to charity at the end of the payout period. Actuarial formulas determine the value of the remainder passing to charity, which is a tax deduction in the year the trust was funded. 

You could also set it in reverse via a lead trust where the charity gets the money upfront. Then, whatever remains goes back to you or your designated beneficiary.

A newer trend of ESG investing is also starting to be seen as what could be considered charitable giving without directly contributing to a non-profit organization. The jury is still out whether or not people are giving up investment returns by limiting the investments they’re willing to make. One way to cautiously participate is not to restrict your investment opportunities because you want to invest in ESG. Instead, take the money you make from investments and put that forth into ESG type endeavors.

There are all kinds of unique ways to give a gift other than simply writing that $50 check. How do you choose the right one? Like any serious monetary decision, you need to have a conversation with an expert to discuss the various options to achieve your goals.

Foundations and donor-advised funds. Two common vehicles.

Two straightforward techniques are foundations and donor-advised funds (DAF). These entities are effectively a charity whereby you receive a tax deduction in the year you make contributions into the entity but can distribute funds out to public charities over time. These entities are particularly effective in years that you have higher than usual income as the deduction is taken at the time of funding, but the public charities can receive the funds over time, which allows you to match high-income years with deductions so that you can then gift to public charities even during low-income years. An additional benefit to these entities is that your charitable giving is invested so that the foundation or the DAF grows to allow more dollars to eventually end up in the hands of the public charities.    

Let’s say you have a single lump sum event in one year (e.g., large bonus, inheritance, or a windfall from a company sale). Your adjusted gross income for that year is bigger than usual. That allows for a greater capacity for taking deductions and making charitable gifts. You can put a substantial contribution into a foundation or DAF and get a corresponding tax deduction while allowing the foundation or DAF to apportion that money out to public charities over several years in the future.

While DAFs only represent 0.07% of the 1.4 million registered public charities, the growth of DAF giving in 2020 brings this option to light for many budding philanthropists. DAFs are known for their streamlined process. The traditional way of creating a private foundation has various administrative and compliance requirements, such as filing an annual Form 990 tax return. The donor-advised fund has allowed custodians such as Fidelity, Schwab, and the likes to offer a fund without the expense and compliance headaches associated with foundations.

There’s also a requirement to make annual distributions or payout of 5% of overall holdings annually with a traditional foundation. Unlike private foundations, DAFs are not obligated to meet annual distribution requirements. Thus, DAFs can opt to retain a higher percentage and invest money to grow and multiply. It’s similar to college endowments and how much they actually use versus what is kept to invest for growth purposes. The donor-advised fund is able to grow as much as possible so that donations can be given, sometimes even more so, when there is a greater need. 

As with any financial instrument, there are pros and cons to DAFs or foundations. For the most part, taking the approach that the vehicles available are there to allow any type of person to find a way to donate in a manner that fits their situation and allowing at the individual level to put more in when you have good years.

Large or small gifting, oversight needed.

Regardless of the size of your philanthropic endeavors, there are several resources to help. At a minimum, research a charity before you give to see how every dollar donated is allocated. Online tools like Charity Navigator rate charities by financial health, accountability, and transparency.

In the case of a multimillion-dollar gift to a foundation or DAF, where you expect amounts to be distributed over time to various charities or to a specific charity at the moment, one thing that is sure to happen is a lot of wrangling back and forth between the charity. It’s not uncommon for large gifts, particularly to schools, to have multiple lawyers involved and end up producing a 30-page contract. It makes sense as the foundations want to control the gift in one way, but a donor also desires some form of oversight. While the donation amount may be rare, a resource like a multifamily office can help give a better chance that the donations are used as you intended.

Having a multifamily office involved may further benefit you if you want multiple generations involved in the foundations or your DAF. The advisor from the family office can meet with the foundation several times a year, often with three generations in the room – the original donor, their children, and their grandchildren. They collectively create the foundation of that institutional model as the family and act as a committee to oversee how funds are invested. They may want to have an ESG tilt, they could all have grant-making authority where one grandchild desires to benefit the Red Cross, but another grandchild seeks to benefit his town volunteer fire department. They can each make gifts or act as a committee to collectively decide what specific amounts charities receive each year. 

For many C-suite executives, engaging with a family office is a way to have a full-service resource to look out for investments, tax planning, estate planning, risk management, and giving. The family office allows the executive to focus on their company as the family office focuses on their personal issues. Like the executive that has a succession plan for their company, the family office (which supports not one but many families and generations) also ensures that each family has a succession plan.

The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to the accuracy, completeness, or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth or the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
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