Gifting Strategies for the Not-so-Rich Philanthropist

Gifting Strategies for the Not-so-Rich Philanthropist

Here are some charitable-giving ideas for those who have earnings or savings beyond what they need for a comfortable life, but not so much wealth that they have tax attorneys and estate planners regularly advising them about gifting alternatives.

Why:  Some people make charitable gifts out of habit, religious commitment, or pressure “at the office.”  Others feel that giving back to the community is what any decent human being would do, in gratitude for all that was given to them during the course of their life.  As a person gets older, the realization sets in that “you can’t take it with you” so you might as well make plans for the use of your assets while you are still able to.

Set priorities: Sending around numerous small checks to charities who happen to send you solicitations is usually not a good way to spend charitable dollars.  Thinking through priorities and making larger donations to a smaller number of charities that match one’s goals may be a better way to make meaningful gifts and an easier way to track charitable giving.  Think of categories of recipients such as religious institutions, international relief, local human services, the arts, education, civil rights, parks, environmental concerns, etc.  

Research:  After selecting a small number of categories, research the organizations that work in that area to find those that are effective and best match your priorities.  A website such as http://www.charitynavigator.org will be a big help in evaluating these organizations.  Within each category of organization, consider whether you want your gift to go towards emergency relief, routine current expenses, buildings projects, innovative new programs, or other special type of assistance.

Local gifts:  Consider gifts to an organization that you are a member of or where you volunteer.  Find out what type of gift is most desired by the organization.  This is really like giving a gift to yourself because you are likely to benefit from the gift, while also helping others.  You may find that the organization would prefer an automatic monthly payment, rather than a one time donation.  An automatic monthly payment helps to ensure the organization has a steady income throughout the year, saves solicitation costs and gives the donor an on-going record of donations either through credit card or bank records.  It allows the donor to plan once for the size of the donation and have it automatically implemented, as long as there is sufficient money in the bank account or credit on the credit card.  When setting up an automatic donation, make sure you know whether the commitment is just for a limited time or whether it will automatically renew at the end of the year.

Staying in touch: Even if an organization is not local, you may be able to be involved by participating in online educational programs, traveling to visit sites where the group provides services, or simply perusing their website to get a better understanding of how funds are used.  If your gifts are substantial or involve a planned gift in a will or trust, you may be invited to special local events when representatives of the organization come to your area.  Taking advantage of these opportunities gives donors a chance to better understand how their donations are used and to decide whether they want to make further donations.  You benefit by becoming better educated about the charity’s work and from the interesting people you will meet through activities sponsored by the charity.

Donor-advised Fund: Some people prefer to make a large donation to a charity which will hold the funds and let the donor direct specific donations to various charities over time.  There is usually a minimum donation amount to set up this type of fund. For example, a person might put $200,000 from an inheritance or insurance pay-out in a Donor-advised Fund with a community foundation, such as the Seattle Foundation (http://www.seattlefoundation.org), with the Foundation managing the funds until you have advised them of the charities you would like to have as recipients.  In this way, the donor can take a tax deduction for the full amount of the donation, even though the gifts to the designated individual charities might be paid out over a period of years.  In evaluating whether this is a good plan for the donor, here are some factors to consider:

a.    Could you use a large charitable tax deduction at the time the fund is set up?

b.    Do you have an investment with a large capital gain that you’d like to dispose of without immediately paying the capital gains tax?

c.    Do you like the idea of a foundation sending out your recommended donations, with the opportunity to request no mail from the recipient and the option to have the original donor’s name kept anonymous?

d.    The foundation managing this account will charge fees against the balance in the account, so make sure the fees seem reasonable for the services provided.

e.    Pay attention to how the funds will be invested to ensure the level of risk and the type of investment is something you are comfortable with.

f.     Make sure the agreement with the foundation provides for the use of the funds once you are unable to advise them about the intended beneficiaries.  You may be able to designate another family member to take over the role of recommending gifts from the fund.

g.    Pay attention to the minimum amount of gifts to be made out of the fund.  Be sure the minimum is consistent with your intentions about future gifts.

h.    A donor-advised fund set up through an investment firm such as Charles Schwab (https://www.schwab.com/public/schwab/investing/accounts_products/accounts/trust_estate/donor_advised_fund) will likely have lower fees and smaller minimums, but may not offer services you could benefit from at a local community foundation.

Charitable Annuities: Seniors are often concerned about whether their income will last through their lifetime.  Through a charitable annuity, usually in the amount of at least $10,000, the senior can receive a guaranteed income for life, with any funds remaining at the time of death going to the charity that the charitable annuity was set up with.  The annuity can be set up to benefit either one or two people, so a surviving spouse could also benefit.  Be sure to evaluate whether the charity paying the annuity is financially sound.  Your peace of mind about receiving the payments owed to you is dependent on the ability of the organization to make the payments.  Many charities offer charitable annuities and they are very happy to calculate how much the payments would be, given your age and the amount contributed for the annuity.

Charitable Remainder Trust:  A charitable remainder trust is somewhat similar to an annuity, since it involves a large payment to a charity with an agreement that the donors will receive income for their lifetime.  The difference is that a larger donation, possibly $100,000 or more, is required to set up the trust and the rate of income paid out will vary from year to year as the principal of the fund fluctuates in value.  Depending on how successfully the donated funds are invested, the donor may receive payments that are more or less than what would have been received with an annuity.  When the donor and possibly a second beneficiary have died, the remaining funds will be transferred to the charity.  In some cases, the donor may be able to direct some of the remaining funds to a charity other than the one that set up and managed the fund.

Donations from an IRA:  If you are required to take mandatory withdrawals from your traditional IRA, which occurs after age 70 ½, current tax law allows you to direct all or a portion of that mandatory withdrawal to a charity.  This procedure keeps the withdrawn funds that go directly to charity out of your income for tax purposes.  The donation payment must be processed through the fund custodian, not passed on by the donor.  This strategy can be of special benefit if a person’s total charitable donations do not meet the new minimum required for itemized tax deductions.

Beneficiary designations:  IRA accounts and life insurance policies have designated beneficiaries who receive payment after your death.  You can change those beneficiaries at any time to include one or more charities as beneficiaries.  You can also add a back-up beneficiary in case the primary beneficiary is not living at your death.  In the case of a traditional IRA (NOT a Roth IRA), naming a charity as your primary beneficiary is a good strategy from a tax standpoint, since funds coming out of a traditional IRA are generally subject to income tax, even at your death.  If the intent is for the IRA to continue in place for the benefit of another beneficiary, make sure you understand how that is accomplished at the time of death and alert family members to the need to carefully follow the required procedures.  You might decide it is preferable and simpler to leave the IRA account to a charity and make other provisions for your other beneficiaries.

Get help:  This blog post is not intended to provide legal or tax advice.  My goal is to provide ideas that you can explore with your favorite charity, your tax advisor, your investment advisor and your attorney.  Almost all the strategies described here are things I have done myself and I have learned a lot in the process.  Each person, in conjunction with his or her professional advisors, will need to decide what the best practice is for his or her particular situation.

Comments?  I welcome your feedback concerning the matters discussed here.  I’m particularly interested in learning what others have experienced when using the techniques I’ve discussed here.  Click ABOUT to go to my private comments page.  You may also subscribe to my blog by completing a short form on the SUBSCRIBE page.

Carolyn Hayek