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Charitable Planning

At some point in our lives we will think about how we will be remembered.  Each of us seems to have an inner drive to live a life of meaning and to leave behind something of importance.  The measure of our lives in many ways is calculated in how we have helped others. This is our legacy.


As a species we have an innate need to help and give to our tribe, our family.  It is programmed into our DNA and is a means for survival.  We feel good when we see our child smile upon receiving a sought after holiday gift.  Our heart warms when someone we have helped displays sincere gratitude.  Our brains’ feel good natural chemicals, like dopamine, wash through us to reinforce this behavior.  It just seems to be the right thing to do.    


We share the things of sustenance and discover love transcends our physical desires as we sacrifice a modicum of immediate gratification to share with those we love.  When we move beyond our tribe and family and share and give to others we discover philanthropy.  An examined life requires some form of charity, some way of helping others.


Scientific studies show we are in tune to those around us.   When someone is fearful we feel more attentive and our flight or fight response gets activated.  When someone is happy we wish to get closer to them and share in the happiness.  When someone is suffering we feel empathy.  Our first impulse is to help but sometimes this impulse is over turned by our rational mind and we withhold assistance. 


Intelligent charitable giving is the balance of the emotional impulse to do what is right with the rational calculation of doing the right thing.  We have time, knowledge and money to share with others to build a better community.  The giving of time and knowledge are quite straight forward.  We can volunteer with countless non-profits to provide assistance through an existing structured organization.  We can also can identify unmet community needs and organize people and resources to help mitigate those needs.


The giving of money can be as simple as writing a check or handing a few dollars to a worthy cause.  But, once we start to look at giving larger sums of money we need to understand the financial impact on our personal affairs.  We need to look at income and estate tax considerations and how the gift will impact our future needs. 


To make intelligent gifts, we first separate giving into three components:  current giving, testamentary giving and planned giving.  Each meets a different aspect of our emotional need to give and our rational need to give intelligently.


Current Giving


Current giving generally includes cash or checks, but can also include property.  We give without expecting anything in return other than potential recognition and a tax deduction.  Obviously, once we have made this gift, we no longer have the proceeds available for our personal use.  Subsequently, these gifts tend to be smaller in nature as we give what we can afford. 


Cash is the most financially expensive form of gifting.  In order for us to get cash to give, we must pay income taxes on some larger amount first.  The cash may come from receiving a pay check, dividends, interest or other forms of taxable income.   


We can also give property.  Generally, it is more financially effective to give appreciated property such as stocks.  We can also give real property such as real estate, art and business interests subject to certain conditions.  If we give appreciated property the charity can sell the property and get the proceeds without paying taxes.  We get to avoid the capital gains tax on the appreciation making this type of gift more financially effective than simply giving cash.


Testamentary Giving


This type of gift comes from our wills or trusts and is given to the charity upon death.  We can make larger gifts as we no longer need the money.  We can give all sorts of money and property subject to the charity being willing to accept it.  Charities generally will not accept property subject to debt or legal obligations. The tradeoff comes from what we leave our heirs and what we give to charity.


There is less donor recognition from testamentary gifts.  We can tell a charity we will make the gift, but they know we can always change our mind so it is not a completed gift.  The act of providing for charity in our will gives us a sense of doing something of value and we can direct the money to causes dear to us.


Planned Giving


This tends to be the most complex form of giving.  It is a hybrid; bridging current and testamentary giving.  In allows us to make a large gift today as we control the gift while we are alive with the promise that it will go to charity upon our death.  We are able to get current income and estate tax deductions today and with certain types of planned gifts we can also get income for life.


This allows us to make much larger gifts as we hedge the potential that we may need benefits from this wealth during the remainder of our lives.  There are many forms of planned giving but the three most popular are:


  • Charitable Remainder Trust – These trusts are generally set up for life.  We contribute appreciated property to the trust and the trust sells the property and is exempt from capital gains taxes.  We have control over the proceeds and are given a specified income for life.  Upon our death, whatever remains in the trust goes to a charity of our choice.
  • Private Foundation – Money or property is set aside in a legal structure to benefit society.  Those establishing a foundation are considered custodians of the public wealth and are subject to a variety of rules and regulations.  Donors have control over the wealth and can direct it how they see fit as long as they follow the rules.  They must give away at least five percent a year.  If the foundation earns more on its investments, the foundation can go on indefinitely.  Foundations can be complex and costly to run, but offer the donor control and a certain status in society.
  • Donor Advised Fund – Existing charities formed under specific tax rules can accept donations and set these aside for the donor to make future gifts.  In some cases the donor can also advise on how the proceeds are invested.  Donors get the tax deduction today but can postpone the ultimate distribution of the gift to some future time.  It mimics aspects of a private foundation without the legal restrictions but also offers donors less control. 


Taxes being taxes, the use of deductions comes with restrictions and complexities.  It is not a simple matter to give wealth away and take a tax deduction for it.  Larger gifts require planning for the financial impact to our personal lives along with ensuring we follow the rules to get the tax benefits. 


We can make larger gifts than we ever thought by exploring the creative ways to give.  We can tap our need for philanthropy and get the dopamine running and maybe make society just a bit better.