Too often, our generosity is expressed in an unplanned fashion. As a result, we may miss out on important financial and personal benefits. It’s time to plan a wise giving strategy.
A tax-advantaged giving vehicle such as a donor-advised fund (DAF) is a great place to start. Sponsored by institutions like Vanguard, Charles Schwab and Fidelity, a DAF allows you to make irrevocable, tax-deductible contributions of cash, securities or illiquid assets. Once contributed, the funds are typically invested in a diversified portfolio, chosen based on your personal risk tolerance. They grow tax-free until you recommend that a specific amount be disbursed to a 501(c)(3) charity.
A DAF offers the benefit of “front-loading” your charitable deductions for tax-management purposes. Let’s say you have a large liquidity event of $500,000 this year, but foresee minimal income in the coming four years. Let’s also say you would like to contribute $20,000 annually to the Salvation Army over the next five years. You can maximize the value of this year’s tax deduction by contributing the total value of the next five years’ charitable donations to a DAF this year.
Another great way to maximize your giving through a DAF is by donating highly appreciated securities that you have held for over a year. You can take the tax deduction on the full fair market value (FVM) of the security (up to 30% of your adjusted gross income), and avoid capital gains tax on the appreciation.
A DAF is also a mechanism for charitable legacy planning. Individual estates valued over $5.45 million in 2016 will be taxed at a maximum rate of 40%. By naming a DAF one of the beneficiaries of your will or a trust, you can earmark a part of your estate for charity, thus avoiding estate tax on the gift. By giving family members advisory privileges to your DAF, you allow them to give to certain charities after you have passed away.
Now that you know how to maximize your giving, how much should you actually give, and to which charities? Answering these questions should start with a personal mission statement, one that lays out your charitable-giving goals and identifies who or what you want to impact most. Once you have a written mission statement, you can more efficiently find charities whose purpose aligns with yours.
Choosing the best charities to receive your gifts can be surprisingly difficult—you should do some research. Go back to your personal mission statement. Does the charity’s mission align with yours? And do their actions actually follow their goals? How does the charity measure the impact of its work? It’s important to clearly understand how far your charitable dollar will go.
When evaluating a charity, examine its financials. How much of every contributed dollar is going to the actual cause, and how much is going to overhead and marketing? Remember though, low overhead does not necessarily define a good charity. The local Mittens for Kittens charity may have rock-bottom overhead costs, but are they really making a large impact on your community? Luckily, there are a lot of tools to help your decision. GuideStar, Charity Navigator, and Give.org are great places to start.
Finally, the summer brings plenty of family time as we embark on vacations and road trips, so there’s no better time to start educating younger family members about charitable giving. Get them involved by discussing mutual charitable goals or letting them develop their own mission statement. Include them in the family’s donation decisions, or perhaps set up a DAF just for them. By choosing their own charities, kids can learn how to evaluate businesses and start thinking charitably at an early age.
Now is the time to start planning and executing your charitable giving for 2016 and even 2017. This year, use these tools that will maximize your gift and make the biggest possible impact for the causes that matter most to you.