other Charitable solutions
DIRECT GIVING
Most people give directly to charitable organizations and causes they wish to support, without the use of a giving vehicle such as a private foundation, a donor advised fund, or a charitable trust. This approach is straightforward and uncomplicated. Donors receive an immediate income tax charitable deduction, minus the value of any goods or services they received in return, and they typically are not committed to make repeat gifts. They can give as quickly as they can write a check or transfer securities.
Direct Gifts of Cash
A cash gift is the simplest form of charitable giving. Your tax deduction is equal to the amount of cash you donated, minus the value of any goods or services you received in return. In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60 percent) of the taxpayer’s adjusted gross income (AGI). Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. Contributions that exceed that amount can carry over to the next tax year. To qualify, the contribution must be:
Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.
Direct giving of cash is typically reactive rather than proactive. If the direct giving is solely based on solicitation, donors may not feel as connected to the recipients of their gifts as more consistent supporters do.
Direct Gifts of Stocks, Bonds and Mutual FundsOne of the most tax-efficient ways to give is by donating long-term appreciated securities, including stock, bonds, and mutual funds, directly to charity. When compared to gifting cash or selling your appreciated securities and contributing the after-tax proceeds, you may be able to automatically increase your gift and your tax deduction.
When you donate these types of securities, the amount that you can deduct is the fair market value of the shares/units at the time you make the gift. This includes any taxable gains you would have made on the sale of the stock, as long as you held the security for at least one year. Therefore, if, for example, you bought a stock two years ago for $4,000 and it's grown in value to $6,000 at the time of the gift, you can claim an $6,000 charitable deduction.
The total amount of securities you can deduct on your taxes for the year of the donation might be limited, depending on your adjusted gross income. The IRS limits the amount of your deduction of appreciated property to 30 percent of your AGI for most donations. However, if you donate to certain types of charities, such as veteran groups or non-profit cemeteries, you're limited to 20 percent of your AGI. If you can't deduct all of your contributions in the year you make the donation, they can be carried forward for up to five years.
Direct Gifts of Real Estate, Artwork, and Other Tangible Property
Real estate, both residential and investment, represents a significant portion of the country’s wealth. As such, it should be considered as an asset class for a potential charitable gift. Structured properly, a charitable transfer of real estate can not only serve a client’s philanthropic goals, but also provide significant tax benefits and, under the right circumstances, increased cash flow. Unfortunately, real estate transfers to charity raise a number of tax traps. Professional assistance from a CPA, an attorney or an expert in philanthropy is advised before entering into these types of transactions.
Direct charitable gifts of real estate is challenging not only because of the various tax traps, but also because it requires an understanding of the various charitable vehicles which may be appropriate for the particular donor and the particular piece of real estate. Charitable alternatives for direct gifts of real estate run the gamut from making the gift through a donor advised fund, a private foundation, a charitable remainder trust, a charitable lead trust, or through one of the charitable institutional vehicles mentioned below. Gifts could include bargain sales of the real estate to a public charity or permissible partial interest gifts in which the donor gifts a portion, or all of the real property, to a charitable vehicle but retains an ongoing right to use the property or receive benefits from the sale of the property by the charitable entity (such as a remainder interest in a personal residence or farm or a CRT).
GIVING THROUGH VEHICLES AT A CHARITABLE INSTITUTIONAL
Large charitable organizations sometimes have the resources to employ fundraisers assigned to assist their “major donors” make sizeable direct gifts to the organization but may also help donors establish charitable vehicles such as charitable remainder trusts, charitable lead trusts and charitable bequests that benefit their institution. Fundraisers will also introduce donors to the charitable vehicles their institution have set up for their ultimate benefit.
ENDOWMENTS
An endowment fund is an irrevocable gift that creates or adds to an investment fund at a charitable organization. The donor receives an income tax charitable deduction equal to the amount of the gift to the fund. Donors to endowments typically direct that the funds be used for specific purposes and the charitable organization makes periodic withdrawals from fund in accordance with the funds purpose.
There are three types of endowment funds, and donors must be clear on what kind of endowment they are funding.
Endowments offer benefits to donors that other donation vehicles may not.
Historically, endowments have earned as much as 10 percent and have paid out about 5 percent, or half of their earnings. The unpaid earnings are reinvested. Given a historical inflation rate of 3 percent, most endowments tend to grow in real dollar value.
CHARITABLE GIFT ANNUITIES
Some charitable organizations offer a source of income for donors through a charitable gift annuity (CGA). This is a contractual agreement between the donor and the institution in which the donor makes a gift to the charity and the charity promises to pay a lifetime annuity to the donor or another individual of the donor’s choosing.
The charitable organization is legally obligated to pay a fixed rate of income for the donor’s lifetime. The fixed rate is determined in at the time the gift is made. With a charitable gift annuity, a donor is giving an amount to the charity that exceeds the annuity it promises them- the difference if the gift. Therefore, the annuity amount is typically less than what can be expected from a commercial annuity.
The annuity is backed by the general assets of the charity but is an unsecured obligation. However, by making a gift, the donor receives a charitable tax deduction, reducing the size of his or her estate, and could avoid capital gain taxes if appreciated securities are gifted.
POOLED INCOME FUNDS
A pooled income fund is a trust that is established and maintained by a public charity where gifts are “pooled” together to create a larger fund. Individual donors have separate accounts within the pooled income fund, which are then combine them for investment purposes. Each year, the pooled fund pays out the net investment income among fund participants, proportionally to their investment. Such distributions occur throughout the donor’s lifetime, after which the portion of fund assets attributable to that donor is removed from the fund and transferred to the public charity.
The donations are irrevocable and in some cases the donor may receive a charitable tax deduction equal to the amount of money a charity is expected to receive. Capital gains taxes do not apply to securities donated to such a fund.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Most people give directly to charitable organizations and causes they wish to support, without the use of a giving vehicle such as a private foundation, a donor advised fund, or a charitable trust. This approach is straightforward and uncomplicated. Donors receive an immediate income tax charitable deduction, minus the value of any goods or services they received in return, and they typically are not committed to make repeat gifts. They can give as quickly as they can write a check or transfer securities.
Direct Gifts of Cash
A cash gift is the simplest form of charitable giving. Your tax deduction is equal to the amount of cash you donated, minus the value of any goods or services you received in return. In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60 percent) of the taxpayer’s adjusted gross income (AGI). Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. Contributions that exceed that amount can carry over to the next tax year. To qualify, the contribution must be:
- a cash contribution;
- made to a qualifying organization;
- made during the calendar year 2020
Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.
Direct giving of cash is typically reactive rather than proactive. If the direct giving is solely based on solicitation, donors may not feel as connected to the recipients of their gifts as more consistent supporters do.
Direct Gifts of Stocks, Bonds and Mutual FundsOne of the most tax-efficient ways to give is by donating long-term appreciated securities, including stock, bonds, and mutual funds, directly to charity. When compared to gifting cash or selling your appreciated securities and contributing the after-tax proceeds, you may be able to automatically increase your gift and your tax deduction.
When you donate these types of securities, the amount that you can deduct is the fair market value of the shares/units at the time you make the gift. This includes any taxable gains you would have made on the sale of the stock, as long as you held the security for at least one year. Therefore, if, for example, you bought a stock two years ago for $4,000 and it's grown in value to $6,000 at the time of the gift, you can claim an $6,000 charitable deduction.
The total amount of securities you can deduct on your taxes for the year of the donation might be limited, depending on your adjusted gross income. The IRS limits the amount of your deduction of appreciated property to 30 percent of your AGI for most donations. However, if you donate to certain types of charities, such as veteran groups or non-profit cemeteries, you're limited to 20 percent of your AGI. If you can't deduct all of your contributions in the year you make the donation, they can be carried forward for up to five years.
Direct Gifts of Real Estate, Artwork, and Other Tangible Property
Real estate, both residential and investment, represents a significant portion of the country’s wealth. As such, it should be considered as an asset class for a potential charitable gift. Structured properly, a charitable transfer of real estate can not only serve a client’s philanthropic goals, but also provide significant tax benefits and, under the right circumstances, increased cash flow. Unfortunately, real estate transfers to charity raise a number of tax traps. Professional assistance from a CPA, an attorney or an expert in philanthropy is advised before entering into these types of transactions.
Direct charitable gifts of real estate is challenging not only because of the various tax traps, but also because it requires an understanding of the various charitable vehicles which may be appropriate for the particular donor and the particular piece of real estate. Charitable alternatives for direct gifts of real estate run the gamut from making the gift through a donor advised fund, a private foundation, a charitable remainder trust, a charitable lead trust, or through one of the charitable institutional vehicles mentioned below. Gifts could include bargain sales of the real estate to a public charity or permissible partial interest gifts in which the donor gifts a portion, or all of the real property, to a charitable vehicle but retains an ongoing right to use the property or receive benefits from the sale of the property by the charitable entity (such as a remainder interest in a personal residence or farm or a CRT).
GIVING THROUGH VEHICLES AT A CHARITABLE INSTITUTIONAL
Large charitable organizations sometimes have the resources to employ fundraisers assigned to assist their “major donors” make sizeable direct gifts to the organization but may also help donors establish charitable vehicles such as charitable remainder trusts, charitable lead trusts and charitable bequests that benefit their institution. Fundraisers will also introduce donors to the charitable vehicles their institution have set up for their ultimate benefit.
ENDOWMENTS
An endowment fund is an irrevocable gift that creates or adds to an investment fund at a charitable organization. The donor receives an income tax charitable deduction equal to the amount of the gift to the fund. Donors to endowments typically direct that the funds be used for specific purposes and the charitable organization makes periodic withdrawals from fund in accordance with the funds purpose.
There are three types of endowment funds, and donors must be clear on what kind of endowment they are funding.
- True endowment fund: In a true endowment fund, the not-for-profit institution invests the donor’s funds, and only the investment’s earnings are spent. The gift itself is preserved “in perpetuity.” Often, not all of an endowment’s earnings are spent, and the excess is re-invested to grow the fund’s principal.
- Term endowment fund: This vehicle allows the donated funds to be spent after a period of time, or when some other predetermined event occurs. A term endowment may be established to exist for, say, 25 years. Then, the principal may be spent.
- Quasi-endowment fund So-named because the principal can be invaded upon a decision by the board, the “quasi-endowment” may not be an endowment at all, but rather a restricted gift. Although the donor may intend the quasi-endowed funds to be invested in perpetuity, if the board decides the fund’s earnings underfund its purpose, the board can decide to use the principal to fund the purpose.
Endowments offer benefits to donors that other donation vehicles may not.
- Donations to endowments survive beyond the lives of their givers, creating true legacies. A donor who gives to an endowment is relieved of the burden of managing those funds.
- Endowment gifts can be made in annual increments in the event the donor does not want to give away all or too many assets at one time. The benefits of the gift for the donor may be enjoyed immediately.
- A donor who creates or gives to an existing endowment fund can be assured the organization will use the money for the purposes the donor wishes.
- Through perpetual investment, the benefit to the recipient is magnified beyond what the donor might have been able to give during his or her life.
Historically, endowments have earned as much as 10 percent and have paid out about 5 percent, or half of their earnings. The unpaid earnings are reinvested. Given a historical inflation rate of 3 percent, most endowments tend to grow in real dollar value.
CHARITABLE GIFT ANNUITIES
Some charitable organizations offer a source of income for donors through a charitable gift annuity (CGA). This is a contractual agreement between the donor and the institution in which the donor makes a gift to the charity and the charity promises to pay a lifetime annuity to the donor or another individual of the donor’s choosing.
The charitable organization is legally obligated to pay a fixed rate of income for the donor’s lifetime. The fixed rate is determined in at the time the gift is made. With a charitable gift annuity, a donor is giving an amount to the charity that exceeds the annuity it promises them- the difference if the gift. Therefore, the annuity amount is typically less than what can be expected from a commercial annuity.
The annuity is backed by the general assets of the charity but is an unsecured obligation. However, by making a gift, the donor receives a charitable tax deduction, reducing the size of his or her estate, and could avoid capital gain taxes if appreciated securities are gifted.
POOLED INCOME FUNDS
A pooled income fund is a trust that is established and maintained by a public charity where gifts are “pooled” together to create a larger fund. Individual donors have separate accounts within the pooled income fund, which are then combine them for investment purposes. Each year, the pooled fund pays out the net investment income among fund participants, proportionally to their investment. Such distributions occur throughout the donor’s lifetime, after which the portion of fund assets attributable to that donor is removed from the fund and transferred to the public charity.
The donations are irrevocable and in some cases the donor may receive a charitable tax deduction equal to the amount of money a charity is expected to receive. Capital gains taxes do not apply to securities donated to such a fund.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.