The Tools for Giving

Some charitable giving tools are designed for ease-of-use, some are designed to maximize the incentives provided in the tax law, and some are designed to be as flexible as possible.

We’ll start with the most common tools and work up to the more complex. We’ll discuss when each makes sense and why you might choose one over the other. To aid in your understanding, we’ll also include a hypothetical example: Let’s assume that you have low-basis stock that is now worth $1 million that you would like to donate. The total income on your tax return is $500,000 per year. Note that it is generally better to give appreciated property, such as stock, instead of cash.

Direct Giving to a Public Charity

These include large and small nonprofit organizations, everything from universities, food banks and arts groups to organizations like United Way that spread one donation among many different causes. In our hypothetical example, you would be allowed to deduct up to 30 percent of your income or $150,000 each year for stock contributions to public charities. If you give more than that, you create a carryforward that must be used within five years using the 30% limitation on each future years’ income.

Note that there is a rule that allows you to make direct charitable contributions of up to $100,000 per year from an IRA without affecting your tax calculation.

Donor Advised Fund (DAF)

These funds are often housed within a community foundation such as the San Francisco Foundation, although some investment firms like Schwab and TD Ameritrade also offer donor advised funds through an affiliated public charity. You would typically make a large donation to the DAF at one time, and then direct distributions over the years to your favorite causes. Establishing a DAF can make sense if you have a large sum of taxable income in one year and aren’t sure which charities you would like to support. Since the organizations that administer DAF’s are public charities, they have the same rules about deductible contributions as in the example above. Typically, the public charity handles all tax filings.

Given the changes in last year's tax bill, DAFs could make more sense than they have in the past. The reason is that one way to minimize taxes in multi-year planning is by "bunching" deductions into certain years. We'd be happy to discuss this strategy with you in more detail.

​Charitable Remainder Trust (CRT)

Most trusts are formed to provide for individual people. A CRT, however, is a trust you would form that eventually pays a charity and therefore pays no taxes. Until the final distribution is made, the CRT would typically pay you a quarterly distribution of either a fixed dollar amount or a fixed percentage of the trust’s value.

The tax-free nature of the trust offers advantages: You can contribute property with a low tax-basis, then the CRT can sell it without paying capital gains taxes and its distributions to you would be computed on the full pre-tax value of the property. You would pay taxes, using special rules, on the distributions as you receive them.

The IRS publishes tables regulating the size of distributions you can receive from a CRT. In our example, you might use your $1 million to establish a ten-year trust that pays you $97,000 each year. You would receive a deduction of about $100,000 in the year that you establish the trust, and you would pay income taxes on a portion of each quarterly distribution you’d receive. Assuming a seven percent growth rate in the trust, the remainder of $584,000 would go to your charitable beneficiary at the end of the ten-year term.

Charitable Lead Trust (CLT)

This is the reverse of a CRT: a CLT pays periodic distributions to charity, and the final distribution or remainder goes to one or more individuals whom you designate. A CLT may make sense if you know that you’d like to donate a set amount to charity each year. In our example, a ten-year CLT might pay out $50,000 a year to your favorite charity. Again assuming a seven percent growth rate in the trust, the remainder of $1.25 million would be paid out to the non-charity beneficiaries of your choice after 10 years. Given the structure of a CLT, it can be an effective way of both fulfilling charity wishes and tax-efficiently providing gifts to family members.

Private Foundation

Creating a foundation can give you almost complete control over investments and charitable distributions. Private foundations are independent entities, subject to complex tax and reporting rules. We typically recommend that private foundations be funded at a level of at least $10 million in order to justify the annual tax and reporting paperwork.