Charitable Giving: An Array of Choices

Choosing a method for funding charitable gifts can be almost as difficult as deciding which charities to support. The “best fit” vehicle often depends on the donor’s time frame and desired level of involvement, as summarized in the accompanying Table.

Quick, Easy, and Inexpensive

Sometimes, the quickest and easiest ways to fund a charitable giving program is simply to write a check, direct gifts through an employer-provided payroll deduction program, or use a credit card. Checks and credit cards are especially appropriate for smallish donations, including the purchase of raffle tickets or the cost of attending charitable events, and have the advantage of easy tracking and recordkeeping for tax reporting purposes.

If you have highly appreciated stocks, mutual funds or other capital gain property that you’ve owned for more than 12 months, a direct gift of those appreciated investments is usually preferable to cash. By giving away long-term appreciated property, you secure a charitable deduction equal to the fair market value of the investment and avoid paying capital gains tax on the unrealized appreciation. By avoiding the gains tax, you reduce the after-tax cost of the gift, making gifts of appreciated assets cheaper than equivalent cash gifts. Consequently, we commonly transfer appreciated stocks and mutual fund shares to charities for our clients’ larger charitable gifts.

But, there are some important limitations on gifts of appreciated assets. Charitable gifts funded with cash are limited to 50% of your adjusted gross income (“AGI”) for the year of contribution, while gifts funded with capital gain property are limited to 30% of AGI. Further, the limitation for gifts to private foundations is further reduced to 20% of AGI for appreciated property (30% for cash). If a taxpayer makes gifts in excess of any of these AGI limitations, the excess contributions carry over to the next 5 tax years.

In terms of cost, direct gifts, whether of cash or appreciated property, are inexpensive when compared with the alternative options described below, each of which involves material setup and/or ongoing administration costs.

Donor Advised Funds – A Common Solution

Making charitable gifts using appreciated investments generally makes sense only for gifts over $2,500 due to the operational hassles of transferring stock or other assets directly to charities and the burdens of tracking all this activity for tax purposes. Consequently, most people fund smaller charitable gifts with cash, logistically easier, but without the ancillary benefit of transferring an appreciated asset out of the donor’s estate. There is a better way.

An increasingly popular charitable giving tool, a donor-advised fund, solves the logistics problem and enables donors to conveniently use appreciated securities even for relatively small charitable gifts. Here’s how it works: A donor makes a sizable gift of appreciated property (at least $10,000) to a community foundation or other public charity that offers donor-advised funds. The donor claims an immediate tax deduction for the full value of the gift, subject to the AGI limitations discussed above. The sponsor charity then sells the appreciated asset tax-free, and the donor then “advises” the sponsor charity on when and how to distribute the proceeds to other charities of the donor’s choice. Because many donor-advised funds allow distributions in increments as little as $250, these vehicles can replace most cash gifts.

Donor-advised funds also offer flexibility as to the timing of gifts. The donor can distribute money out of a donor-advised fund to charities soon after the gift is made, or over a period of many years. In fact, some donor-advised funds allow the donor to name successors (e.g., children or grandchildren) who, upon the death of the original donor, can step into the donor’s shoes and continue advising the sponsor charity on distributing the family’s largesse over even multiple generations. Meanwhile, the charitable gift “account” is invested in a pool of equities and fixed-income investments that should grow over time, adding to the pool that the donor can distribute.

As part of its role being the “conduit” for the donor’s charitable gifts, the sponsoring charity takes care of all the administrative work and tracking of information for tax purposes so that donors can leverage their time and focus solely on grant-making. Many sponsors also provide donors with assistance in locating and evaluating charitable organizations to receive grants. For larger donors, sponsors will even follow up with charities that have received grants to ensure that the charity has used the grant effectively.

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