Choosing the Right Charitable Giving Option
Charitable giving is a powerful way to support causes you care about while also receiving tax benefits. Whether you want to keep control over your donations, simplify the process, or maximize tax savings, there are different ways to give. Understanding the options can help you make the best choice for your financial and philanthropic goals.
Private Foundations
How They Work
A private foundation is a nonprofit organization created and funded by an individual, family, or corporation. It can distribute grants to charities, provide scholarships, or directly operate charitable programs.
Management and Control
Private foundations require significant oversight. They must file annual tax returns (Form 990-PF), follow self-dealing rules, and distribute at least 5% of assets annually. The foundation's board—often including the founder—makes decisions on grants and investments, offering flexibility in how funds are used.
Tax and Estate Benefits
Contributions reduce estate size and potential estate taxes.
Cash donations are deductible up to 30% of adjusted gross income (AGI), and appreciated securities up to 20%.
Private foundations pay a 1.39% excise tax on investment income.
Charitable Trusts
How They Work
There are two main types of charitable trusts:
Charitable Remainder Trusts (CRTs): Provide income to the donor or other beneficiaries for a set time, with remaining assets going to charity.
Charitable Lead Trusts (CLTs): Provide income to a charity first, then transfer the remaining assets to heirs or other beneficiaries.
Management and Control
A trustee manages the trust’s assets, investments, and distributions. The donor may serve as the trustee or appoint someone else, but once created, the trust terms cannot be changed.
Tax and Estate Benefits
Contributions remove assets from the taxable estate, potentially reducing estate taxes.
CRTs offer an immediate tax deduction and defer capital gains taxes on appreciated assets.
CLTs can reduce gift and estate taxes for heirs.
Donor-Advised Funds (DAFs)
How They Work
A donor-advised fund is a charitable giving account managed by a public charity or financial institution. Donors contribute assets, receive an immediate tax deduction, and recommend grants to charities over time.
Management and Control
DAFs are easy to use because the sponsoring organization handles tax filings, grant distributions, and other administrative tasks. While donors can suggest where the funds go, the final decision rests with the sponsoring organization.
Tax and Estate Benefits
Contributions reduce estate value for tax purposes.
Cash donations are deductible up to 60% of AGI, and appreciated securities up to 30%.
Donors avoid capital gains taxes on donated stocks or assets.
Donating Appreciated Stock
How It Works
Instead of selling stocks and donating the proceeds, you can donate appreciated stock directly to a charity. The charity then sells the stock tax-free.
Management and Control
The charity handles the stock sale and provides a tax receipt. Once donated, the donor no longer controls how the funds are used, though they may be able to designate a specific purpose.
Tax and Estate Benefits
The donor receives a tax deduction for the fair market value of the stock (up to 30% of AGI for public charities and 20% for private foundations).
Capital gains taxes on the appreciated value are avoided.
Reduces the size of the taxable estate.
Choosing the Right Option
Each charitable giving method offers different advantages:
Private foundations provide the most control but require significant administration.
Charitable trusts offer estate and tax benefits while structuring gifts over time.
DAFs provide a simple way to give with fewer administrative responsibilities.
Donating appreciated stock maximizes tax savings while supporting a charity immediately.
Get Expert Guidance
Choosing the best charitable giving strategy depends on your financial situation and long-term goals. If you're considering making a significant gift, it’s important to understand the tax and estate planning implications. Reach out to The Purple Group for guidance on selecting the right charitable giving option to align with your goals. We’re here to help you maximize your impact while making the most of available tax benefits. Schedule a consultation today!
