Are there charitable causes you feel strongly about that you want to support? Do you want to integrate philanthropy into your family life? Do you wonder which method of charitable giving is right for you?
People often engage in charitable giving because they feel strongly about a specific cause and want to make a difference. There are many ways to be philanthropic and help a cause or organization, whether it is in your local community or in another country. No matter how or what you decide to give, from a financial standpoint, charitable giving can be an important part of your estate, tax and financial plan.
Many people, especially those with substantial wealth, have a strong desire to create a lasting legacy. A charitable giving plan can help bring families closer together, uniting family members across generations, geographic locations and life circumstances. In addition, integrating philanthropy into your family life can be an excellent way to pass on family values about money and helping others, especially to the younger generations.
Choosing the right vehicle for your charitable giving goals
Figuring out what to give, how to give and when to give can be challenging. For a lot of people, the easiest way to support a cause or organization is with a cash donation—a practice that is sometimes referred to as “checkbook philanthropy”—which means you donate cash by writing a check in response to a specific request.
However, if you have a larger estate, want to donate other types of assets (such as appreciated stock or real estate), or want to maximize the impact of your donation or tax benefits, you may want to consider taking a more strategic approach to charitable giving. Below are some charitable giving vehicles that may help you do just that.
Charitable gift annuity. A charitable gift annuity is a contract between a donor and a charity. With a charitable gift annuity, the donor makes an irrevocable lump-sum donation of cash or other assets to a charity and takes a partial income tax deduction. The charity invests the donation, and the donor (or annuitant) receives payments on a fixed schedule for either the term of the agreement or for life, depending on the terms of the agreement. When the donor or the annuitant dies, the charity receives the balance of the invested funds.
Donor-advised fund. With a donor-advised fund (DAF), you invest, grow and donate assets to charities for meaningful and lasting impact.
A DAF is a charitable giving account that is administered by a public charity, which is typically sponsored by a financial institution or community foundation. Although you can recommend how those assets should be invested and where and when to make grant recommendations, the sponsoring charity has ultimate discretion over the management and administration of the DAF.
A donor-advised fund is relatively easy to set up and can allow you to involve your family in gifting decisions.
Retained life estate. A retained life estate is an irrevocable gift of real estate to a charity. It is similar to a gift annuity in that you are able to retain the right to use or occupy the donated property for a period of time. The deduction, however, is generally smaller than what you would be eligible for if you make an outright donation.
Charitable trusts. Charitable trusts such as charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are referred to as “split interest” trusts because they have both charitable and noncharitable beneficiaries.
A CRT can generate an income stream for donors and other named noncharitable beneficiaries, with the remainder of the donated assets passing to your designated charity when you die. A CLT is essentially the inverse of a CRT. With a CLT, the charity receives the income stream for a set period, and your heirs receive the remaining assets at the end of the term or when you die.
Private family foundation. A private family foundation is a charitable organization set up by a family, funded with family assets and managed by trustees who are often family members. With a private family foundation, you have more control over your giving, but with a greater administrative burden and higher costs compared to other charitable giving vehicles.
A private family foundation can exist for as long as the family needs it to serve its philanthropic goals. It can also adapt to changes in the family and charitable focus. Also, with a private foundation, donors have complete control over grant-making and investment decisions, which includes the ability to engage in a wider range of philanthropic activities not available through other giving vehicles, such as grants to individuals and scholarship programs.
Charitable LLC. A charitable limited liability company (LLC) is a business entity with a charitable purpose. It provides greater flexibility and more control than traditional tax-exempt entities. Unlike private family foundations, charitable LLCs require less public disclosure and do not have annual distribution requirements. Also, for tax purposes, an LLC is a pass-through entity, meaning that all financial activity passes through to its owners.
If you are considering a charitable giving plan, it’s important to consider the financial and tax implications. We recommend discussing your charitable planning goals with a wealth advisor who can help you determine the best charitable giving structure for your situation.
CIBC Private Wealth’s Wealth Your Way podcast series is an educational offering for clients and their children, and demonstrates our commitment to developing the rising generation. Listen to the podcast on charitable planning strategies here. There, you will also find other informative podcasts that are designed to help rising professionals steer through their personal financial journeys.
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