Financial strategies to simplify giving
There are myriad ways to give that provide both personal satisfaction and financial planning benefits. If you’ve thought about giving, work with your financial advisor to develop a strategy to help ensure you can live comfortably while giving wisely.
To prepare you for the process of deciding how best to give, here are five giving strategies to consider. They range from simple and straightforward to detailed and complex.
Best for – Those who give to a limited number of charities in relatively smaller amounts.
How it works – Choose what groups to contribute to, how much to contribute and – depending on the charity – how your gift is used. You can deduct gifts and receive tax benefits.
GIFT OF LIFE INSURANCE OR RETIREMENT ACCOUNTS
Best for – Givers who have an insurance policy no longer needed for its original purpose or who are looking to maximize a charitable gift by minimizing exposure to estate taxes.
How it works – Somewhat more complex than outright giving, but straightforward when compared with other charitable giving instruments. It provides a large benefit at relatively low cost and can be accomplished in several ways:
- Existing contract
Ownership of an existing life insurance contract is transferred to a loved one or charitable organization. You pay a gift tax on a percentage of the policy’s value at transfer, but when it’s ultimately distributed, the payout won’t be taxed as part of your estate.
- Wealth replacement
Instead of naming your heirs as a beneficiary on your retirement accounts, you maximize your charitable impact and tax protection by designating a charity as a beneficiary of the retirement account, those assets distribute to the charity tax-free, and then you “replace” those assets in your estate by purchasing a life insurance policy to benefit the heirs.
- Maximum gift
Use this strategy when the goal is to make a big impact with an existing asset, like property. Property is given to the charity and the tax savings is used to fund a life insurance policy with that same organization as beneficiary.
CHARITABLE REMAINDER TRUST (CRT)
Best for – Givers who would like to create an income stream for themselves or loved ones while also establishing a charitable legacy.
How it works – A donation is made to a charitable trust. If a donation other than cash is made, those assets are typically liquidated shortly after being transferred into the trust for investment into an income-producing portfolio. Then you – and any other non-charity beneficiary you name – receive income based on the type of CRT. You receive an immediate tax deduction and, upon your death, or after a term of years [not to exceed 20], your designated charitable organization will receive the remainder of the assets in the trust.
CHARITABLE LEAD TRUST (CLT)
Best for – Givers who have an asset that likely will appreciate greatly in value and want to hang onto it while putting it to good use in the meantime – and enjoy some tax befits.
How it works –Givers who have an asset that likely will appreciate greatly in value and want to hang onto it while putting it to good use in the meantime – and enjoy some tax befits. How it works – A charitable lead trust “leads” with the gift as opposed to leaving it. It involves gifting an asset that is typically then sold and the proceeds reinvested, or the income-producing asset remains in trust. Income generated goes to the charity, or charities of your choice for a for a fixed term, such as a set number of years or the life of one or more people, with the remaining principal or asset passing back to you or to your non-charity beneficiaries. Depending on your priorities, a qualified CLT is an effective planning tool that can serve to reduce federal estate, gift and/or income taxes.
Best for – Serious givers who are typically donating a substantial percentage of their annual incomes or who have a specific philanthropic mission.
How it works – A foundation is created by an attorney with your philanthropic goals as its primary mission. The foundation must establish a board, make mandatory distributions and pay taxes on the foundation’s net investment income. Records must be kept and reports made on the foundation’s grant-making and other activities.
DONOR ADVISED FUND (DAF)
Best for – Givers who desire a happy medium – the ease of direct giving with the potential to make a more organized, effective impact without the administrative duties and time required by a private foundation.
How it works – Because the funds are sponsored by a charitable organization, you can avoid the cost and upkeep associated with creating a foundation while still guiding grant-making decisions. An irrevocable contribution is made to the fund, typically with cash or marketable securities. You take a tax deduction, the assets are sold and reinvested, and you make grants based on your charitable goals.
NOW THAT YOU'VE GAINED SOME INSIGHT ...
It may be time to dig in and start outlining or revisiting your own charitable giving plan. Then, be sure to schedule time to discuss your thoughts and ideas with your financial advisor.
Raymond James advisors do not provide tax and legal advice.