Options and Reasons to Make Charitable Donations
Charitable giving is an important part of our American culture. According to Giving USA, Americans donated $484.85 billion to U.S. Charities in 2021.1 If you’re considering your charitable gifting options, the following information can help you get started.
Options for Giving
There are many ways to donate to charities, and each has different characteristics and tax implications. Several options for giving include:
- A direct gift to an individual – In 2023, the annual gift tax exclusion is $17,000 per person ($34,000 per couple).
- A direct gift of an asset to a charity – The two common types of charitable donations are cash and marketable securities. Many 501(c)(3) qualified organization can also accept less traditional donations, such as real estate and grain. However, some non-traditional assets such as art and collectable coins can be more challenging.
- A gift to a donor-advised fund (DAF) – A donor-advised fund is a charitable fund that houses donations for current and future giving. The donor who makes a gift to the fund retains control over the timing of its distributions and the organizations to which donations are made. For example, suppose that in 2023, John and Mary Jones donate $100,000 to a DAF at the Greater Kansas City Community Foundation. The $100,000 can no longer be accessed by Mr. and Mrs. Jones for their personal use. However, the Joneses can dictate the timing of donations (2023, 2024, 2025, etc.) to their charities of choice. The amount of the gift and the underlying assets remaining in the fund can be managed by an advisor such as Creative Planning. There is no deadline for the distribution of funds, and the Joneses are not locked into any specific charity; multiple charities can be chosen, if desired.
- A gift to a family foundation – A private family foundation is established and funded by a family in order to serve the family’s philanthropic priorities. Typically established by ultra-high-net-worth families, it is often run by family members who make decisions on how it is used. The charitable focus of a family foundation can change over time as new family leaders take over its allocation.
- A gift to a charitable trust – There are various types of trusts that can be used for charitable giving. Examples include a charitable lead trust and a charitable remainder trust.
- A gift to a 529 plan – Gifts to 529 college savings plans are subject to similar rules as gifts made to individuals. However, 529 plans allow for the acceleration of giving for five years. In other words, an individual can donate up to $85,000 in 2023 (annual maximum gift amount of $17,000 per year times five years), while a couple can donate up to $170,000 (annual maximum gift amount of $34,000 per married filing jointly times five years).
Reasons for Giving
There are even more reasons for giving than there are options for how to give. Following are a few examples of why people choose to make charitable contributions.
- To leave a long-term legacy – Your charitable gift can benefit others well beyond your lifetime. Andrew Carnegie was once the richest man in the world. Following his death, he left a legacy by funding thousands of libraries around the world, which has enriched countless communities over the years.
- To see the benefits – If you make a gift to an individual or a charity during your lifetime, you have an opportunity to experience the benefits of that gift. For example, seeing a building erected in your community that you helped fund can provide you with a sense of pride.
- To help someone get started – Anyone in our country who has achieved success has likely received help and guidance from many people along the way. Providing financial assistance, such as a college scholarship, can help you give back to someone else as they begin their own journey toward success.
- Guilt – There’s no shame in giving back because you feel guilty. There’s a story that when Alfred Nobel’s brother died, the newspaper accidentally published Alfred’s obituary instead (Alfred was still alive). Up to that point in his life, Alfred was known for invention of explosives/dynamite and was condemned for this in the accidental obituary. Not wanting to leave this as his lasting legacy, upon his death, he established the Nobel Prizes. Guilt can serve as the inspiration to make a difference.
- Tax benefits – The U.S. tax code provides multiple advantages for charitable giving. Most benefit those who make an irrevocable gift. The benefits vary greatly based on the taxpayer’s specific situation and the vehicle(s) used.
The benefits of giving are often greater for the person giving than the gift’s recipient. There is a lot to be said in making a difference in the lives of others. At Creative Planning, our advisors work with clients to develop customized charitable giving strategies. By incorporating charitable contributions into your overall financial plan, we help ensure you are maximizing not only your tax benefits, but also your charitable impact. If you would like assistance with developing your charitable gifting strategy, please contact us.
