Charitable Giving and Planning for Your Legacy
By Steve Lear, ChFC, CLU, BFA™
What’s Included:
- What is Charitable Giving?
- Why is Charitable Giving Important
- The Benefits of Charitable Giving
- The Challenges of Charitable Giving
- The Impact of Charitable Giving on Your Legacy
What is Charitable Giving?
Charitable giving is the act of voluntarily donating to an organization that aims to benefit the public good. Philanthropy offers us the opportunity to discover purpose and meaning in our own lives while also giving back to those in need. According to Bank of America, 85.1% of affluent households give to charity. But you don’t need substantial wealth to be a philanthropist, just a passion to make a difference.
Why is Charitable Giving Important
My years of experience in the financial services industry have helped me understand the value and impact that charitable giving has on individuals of all economic backgrounds - not only for those receiving gifts but also for those giving them. Charitable giving allows you to make meaningful contributions to organizations that share your core values. The process is strategic, advantageous, and unique to you. It is an integral part of the legacy you leave behind.
The Benefits of Charitable Giving
Charitable giving not only benefits the organization you are giving to, but can also benefit you personally. Below are five benefits of charitable giving.
Lower Your Income Tax and Reduce Your Taxable Estate
Donating to eligible charities can help reduce your taxes. The general idea is that if you itemize deductions on your tax return, including charitable giving deductions, charitable giving can help lower your taxable income, thus reducing the amount of taxes you owe. Donations over a certain amount can even be carried forward for up to five subsequent tax years. The limit varies based on the type of donation you’re giving.
However, the tax aspects of charitable giving can be complex. The tax advantages of charitable giving depend on three primary factors:
- The recipient – because only donations to qualified charities are deductible
- How you structure the gift – whether it is a regular or a one-time donation
- The type of donation you are giving – different types of property donations, including cash, business assets, and investments, offer varying tax advantages and drawbacks
Suppose your estate is subject to estate tax. Charitable giving can help reduce the amount of your estate that is subject to taxation as well. If your taxable estate, the value of all assets at the time of your death, is greater than the estate tax exemption limit, the amount above the limit will be taxed at progressively higher estate tax rates. Through charitable giving, you can reduce the amount taxed at the highest rates.
Due to these complexities, it is often beneficial to work with financial professionals, including both a financial planner specializing in tax planning strategies and a tax accountant specializing in tax filing.
Help Make the World a Better Place
There are many of people around the world who need aid. We all want to make the world a better place, but it’s not easy to do on your own. With the power of charitable giving, you can combine efforts with like-minded individuals to support organizations that make a real difference. Your donation could impact more people than you can imagine.
Mental Health Benefits
Mental Health America says that one of the primary benefits of charitable giving is the sense of satisfaction and fulfillment it brings. Giving to a cause that can make a difference on a larger scale than you can as an individual is very gratifying. This feeling can even improve self-esteem and self-worth.
With positive self-esteem and self-worth comes an overall happier attitude and mood. Your outlook and perspective on life may improve. This can lead to a possible decrease in your risk of depression or depressive symptoms such as sadness or fatigue.
Physical Benefits
Not only are there mental health benefits, but there are also physical benefits. According to Save the Children, charitable giving has been shown to ease stress, depression, and anxiety, which can lead to health issues like high blood pressure, headaches, and insomnia. One study even correlated charitable giving to a longer lifespan. Charitable giving can benefit the world, while also giving you a healthier, and potentially longer, life.
Avoid Capital Gains Taxes
Gifting highly appreciated stocks can be a win-win for the donor and the charity. When you give stock to a qualified charity, neither you nor the charity pays capital gains taxes. You can give the full value of the stock, and by avoiding capital gains taxes, you can make a larger impact than if you had sold your stock first, paid taxes, and donated the remaining cash.
The Challenges of Charitable Giving
In my experience, the hesitation to give to charity stems from two challenges: confidence and planning. The great thing is that financial planning can help solve both of these challenges!
Challenge #1: Confidence
It is natural to prioritize our wants and needs before considering the wants and needs of others. Maslow’s Hierarchy of Needs explains the psychology behind this behavior. We must meet our basic physical and psychological needs before realizing our highest potential (self-actualization). It is not until we reach this stage that we can shift our focus to helping others.
When we give back by donating our time or money to an organization, we get closer to becoming the best version of ourselves. I have yet to meet someone who doesn’t experience joy and gratitude when supporting a cause that provides a valuable service to society. However, we can only truly embrace self-actualization when we feel secure that our needs are being met. That is where financial planning comes in.
Financial planning enables you to increase your giving with confidence by providing the following information:
- A clear understanding of your financial picture. Having a thorough understanding of your financial picture is the first step toward confident charitable giving. Gaining sightlines into your assets – including retirement savings, bank account balances, and home value – and your liabilities – such as your mortgage, car loan, and other debts – will help you begin to determine if you have excess funds.
- Confidence in the progress you are making toward your financial goals. Much of the financial planning process is goal-based. Planning for retirement, buying a home, and saving for education are examples of common financial planning goals. Financial planners help track your progress toward your goals. They can offer assurances (or advice) about the likelihood of success (or failure). When you feel confident that you are on track to meet all of your financial goals, you can start thinking about the financial goals of others.
Challenge #2: Planning
We spend a lot of time planning vacations and special events. We work to ensure that special occasions run smoothly, bringing us joy and fulfillment. We value the time spent planning, as it creates a sense of security and confidence about what lies ahead. But what if we devoted equal time to planning how to help others?
Financial planners use defined strategies to maximize the impact of a charitable gift for both the recipient and the donor. These strategies include:
Establish an Annual Giving Amount
Defining a formula for allocating a specific percentage of your asset base to philanthropy can streamline your philanthropic efforts from year to year. Examples of charitable giving formulas include:
Establish a percentage of your earned income or a percentage of your asset base – for example, allocating 5% of your earned income or 1% of your asset base – to charitable giving.
Cap your net worth and give away any assets exceeding that amount.
Forget the math and go with your instincts. Determine the priority level for charitable giving given your goals and values.
Consider a Dedicated Foundation or Fund
If you’re passionate about philanthropy and want to pass it on to your beneficiaries, you can establish a private foundation or set up a donor-advised fund. There are pros and cons to using a private foundation or a donor-advised fund, so it’s best to discuss these options with your financial planner before deciding which option to utilize.
Private Foundation:
A private foundation is a charitable organization established by an individual, family, or business to support various causes. A board manages charitable donations, invests the donations, and gives grants to other charities. The foundation must also file taxes and comply with other administrative requirements.
Establishing a private foundation can create a lasting legacy. Family members, beneficiaries, and more can be employed or serve as members of the board. Additionally, with complete control over grantmaking, you can support organizations beyond public charities. While you must still adhere to IRS procedures, donors can make grants to charities run by individuals, scholarship programs, and other entities, making it very flexible when it comes to supporting alternative types of giving.
Donor-Advised Fund:
A donor-advised fund is an account specifically designed to facilitate the making of qualified charitable gifts. Donor-advised fund, or DAF, accounts are held by a sponsoring organization, such as a public charity, like a community foundation, or the charitable arm of a financial institution, such as Schwab’s DAFgiving360™. When you make a gift to a donor-advised fund, you receive a tax deduction in the year of the contribution. You can use the funds in the account to create a legacy that offers grantmaking flexibility through time.
Donor-advised funds simplify the administrative side of giving significantly, as the sponsoring organization handles the paperwork and other legal tasks associated with the fund. They also cost considerably less than a private foundation.
Make a Qualified Charitable Distribution (QCD)
If you’re retired and have an IRA, you must begin making required minimum distributions (RMDs) from your IRA once you turn 73, or you’ll be charged a penalty. With a Qualified Charitable Distribution (QCD), you can meet your RMD requirement by giving the distribution to charities of your choice rather than adding to your taxable income.
Leaving a Legacy
A legacy plan is an opportunity to ensure your vision for the future. Consider a legacy plan that includes charitable giving in whatever way is most meaningful to you. This allows you to pass more than just financial assets to future generations. Leaving a gift to charity is a way for you to pass on your values and legacy.
Financial planning plays a crucial role in charitable giving because it addresses two challenges that often deter many would-be philanthropists: confidence and planning. Financial planning helps individuals gain the confidence in knowing they have sufficient resources to meet their current needs and achieve their future goals. Financial planning utilizes strategies to help people determine not only how much to give but also how to give in a mutually beneficial and tax-efficient manner. After many years in the financial services industry, I have come to realize that contributing to causes you believe in prioritizes the need to give back and demonstrates the vital role of generosity in building a thriving society.
What will your legacy be?
If you’re ready to start planning your legacy, contact your Affiance Financial planner today.
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Sources:
https://www.privatebank.bankofamerica.com/financial-education/charitable-giving.html
https://www.schwab.com/learn/story/charitable-donations-basics-giving
https://www.merceradvisors.com/insights/personal-finance/the-benefits-of-charitable-giving/
https://www.fidelitycharitable.org/guidance/philanthropy/private-foundations.html
https://journals.sagepub.com/doi/abs/10.1177/135910539900400301
https://mhanational.org/blog/5-reasons-to-give-to-mental-health-america/
