Charitable Accounts: A Guide to Making Effective Charitable Donations

As I mentioned in a previous article, there are many ways you can give to your favorite charitable organizations including your time and talent, but organizations do need money, too. Charitable financial giving is a powerful tool for making a positive impact and supporting causes we care about. However, it's important to approach charitable donations with thoughtful consideration to ensure our contributions are directed in a way that they can make the largest impact. 

Charitable accounts provide individuals and organizations with a tax-efficient and flexible way to support non-profit organizations over a long time period while maintaining some control over their contributions. There are several types of charitable accounts, including:

1. Donor-Advised Funds (DAFs): DAFs offer individuals a flexible and tax-efficient way to support charitable causes. Donors can contribute cash, assets, and securities to a public charity, receiving an immediate tax deduction for the full value of their contribution. While the public charity legally owns the assets, the donor retains the privilege to recommend grants to specific charities over time, ensuring their contributions align with their philanthropic goals and values.

2. Charitable Remainder Trusts (CRTs): CRTs are an effective strategy for individuals looking to support charitable organizations while also providing income for themselves or specified beneficiaries. These irrevocable trusts distribute income for a set period or lifetime to the donor or beneficiaries. Upon the termination of the trust, the remaining assets are transferred to a public charity chosen by the donor, enabling a significant contribution to a cause they deeply care about.

3. Private Foundations: Private foundations grant individuals, families, or corporations the opportunity to create a lasting philanthropic legacy. By forming a charitable organization and dedicating their assets, donors enjoy an immediate tax deduction for their contribution. One significant advantage of private foundations is the ability to retain control over grant-making decisions and investment strategies, allowing donors to actively direct resources towards charitable projects aligned with their values.

4. Charitable Lead Trusts (CLTs): CLTs are designed to support designated charities during a specified period, ensuring a steady source of income for their initiatives. These irrevocable trusts distribute income to the chosen charity before passing the remaining assets to the donor's beneficiaries upon the trust's termination. CLTs enable individuals to prioritize their philanthropic values by providing ongoing financial support to a cause they believe in, while ultimately benefiting their loved ones in the future.

Benefits of Charitable Accounts

Charitable accounts offer several advantages, including:

1. Tax Efficiency: Charitable accounts offer a tax deduction for contributions, allowing the donor to maximize their impact on the charity while reducing their tax bill.

2. Control: Charitable accounts provide donors with more control over their contributions by allowing them to recommend specific organizations to support or specifying charitable activities to fund.

3. Flexibility: Charitable accounts are flexible, allowing donors to make contributions to the account when they have the capacity and recommend grants to charities over time.

4. Legacy Building: Charitable accounts allow individuals to make a lasting impact by creating a charitable legacy that continues to support causes they care about.

There are also a couple simple strategies to consider if you’re looking to make a contribution on an annual basis, but still maximize the tax efficiency of your contribution.  

1. Qualified Charitable Donations (QCD): If you are over age 70½, you can direct money to a charity directly from your IRA account.  This QCD is not taxable to you, the contributor, nor is it taxable to the charitable organization.  This is a way to avoid tax on this distribution and get a tax benefit for the donation. 

2. Gifting Appreciated Stock: If you own stocks in a non-retirement account that have significantly appreciated over time, consider gifting the shares in lieu of cash to the charity.  By gifting the shares, you will not pay capital gains tax on the stock and the non-profit organization will not pay tax when they sell the shares either.  There is no age limitation for this strategy. 

If your preference is to leave money to charity at your death, consider naming the charity a beneficiary on your IRA and pre-tax accounts rather than on after-tax accounts or naming the charity in your will.  Doing this makes the beneficiary easy to change if you want to update the bequest before death.  It is also a way to pass taxable assets to the tax-exempt charitable organization while potentially leaving less taxable assets to your other heirs. 

With careful research and planning, these strategies can help maximize your charitable impact and contribute to causes that you care about in a meaningful way.  Please reach out to us today for guidance and assistance in your charitable giving goals.