If you’re like many Americans, you want to give to the causes and charities you believe in. Generosity is a tradition in America, after all—and one that’s getting stronger. Charitable donations last year reached an all-time high of $373.25 billion, according to Giving USA 2016: The Annual Report on Philanthropy for the Year 2015. But how do you give? Do you write a check to a charity you like? Do you set up a donor-advised fund? Or do you do something else altogether?
Your answer depends on the amount of involvement you want. Obviously, donating a one-time gift to the Red Cross is less complicated than creating a family foundation that you envision your great-grandchildren running. In addition, you want to consider the kinds of assets you’re giving and the tax advantages you’ll receive. Developing a charitable giving strategy can help you refine your goals and priorities, making it easier to decide on the how of your philanthropy.
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Following is a list of opportunities for giving, ranging from the least complex to the most:
Outright gifts: You can use cash, write a check or pay with your credit card—the result is the same. You support a cause you like as little or often as you like, and you don’t have to be involved in any other way. Assuming the organization has 501(c)(3) tax-exempt status, you get a tax deduction up to 50% of your adjusted gross income (AGI).
You don’t have to limit your gifts to cash. You can also give appreciated stock and other long-term capital gain property. By donating the stock directly rather than selling it and donating the proceeds, you can give a big boost to your charity. That’s because by donating the asset, the capital gains that selling it would trigger no longer apply. Meanwhile, you can get a tax deduction up to 30% of your AGI.
Donor-advised funds: DAFs are becoming an increasingly popular way to give, especially for people who don’t want the regulatory and administrative hassles of a private foundation. DAFs, such as from the Greater Cincinnati Foundation, are flexible. You can donate everything from cash to long-term capital gain property to life insurance policies—and in some cases, even bitcoin—and you will receive an income tax deduction for your donations. Any gifts that cannot be deducted in the current year can be carried over and deducted for up to five years following. And you can give now but decide later who receives your money. DAFs are particularly convenient for making a gift of appreciated stock or mutual fund shares and then granting gifts to several charities. So one gift of $25,000 can be split multiple ways with less paperwork. You can also manage the timing of gifts to make a large gift now for immediate tax benefits but spread the disbursements out several years in the future.
DAFs are popular because they are flexible; however, if you want absolute control over the charities that receive your donations, you might want to reconsider. DAFs are called “donor-advised funds” because your role is to advise. You advise the organization holding your account about the charities you want to give to. The organization ultimately decides. However, it’ll generally follow your wishes for qualified charities.
Private foundations: Setting up a private foundation allows you a long-term—even multigenerational—way to build a legacy. It allows you to involve your family members, thus passing on your values to the next generation. A foundation is similar to a DAF in that it allows you to fund it immediately and choose recipients later. However, private foundations are more expensive to operate and have more legal restrictions than DAFs, and the income tax deductions you can take are generally less. Where the administrative and legal requirements of a DAF are handled by the charity managing it, with a private foundation the responsibility is yours. However, unlike a DAF, you retain control over the distributions, making this setup especially attractive for ultra-affluent individuals and families who want to make philanthropy a cornerstone of their life.
When it comes to generosity, there is a universe of options you can consider. In addition to the above possibilities, you can employ charitable lead or remainder trusts, IRA rollovers and bequests in your will. When deciding what avenue works best for you, consider your personal and financial goals, the level of complexity and control you want, and the amount of time you can invest. Regardless of your decision, you get the pleasure of knowing you helped someone who needed a helping hand. And that makes your time, effort and expense worth it.