Many of today’s philanthropists are everyday citizens attempting to give money to worthy causes. Philanthropic efforts can be random acts of kindness such as giving loose change to a homeless person, or something as sophisticated as setting up a trust or foundation, complete with a board of trustees and an executive director. There are options, each with its own tax implications. For this reason, we offer you seven ways of giving. You don’t have to be rich and famous to set up a foundation; you just need to be willing to give to charitable causes that you believe are worth keeping around. Dwight Raiford, a financial planner, says it’s important to consult a tax adviser as well as work with a financial planner when developing your philanthropic strategies.
Make Annual Gifts to an Established Charity. This contribution can be to a church, an educational institution, a fraternity or sorority, or other nonprofit organization. Make sure that the organization has a 501(c) 3 legal status. This means you can claim the appropriate federal tax deduction, up to 50% of your adjusted gross income for the year for cash and 30% for stock or property. Understand that tax-exempt means the organization doesn’t have to pay taxes; and tax deductible means you can write off your contribution.
Create a Trust. A Charitable Remainder Trust allows you to take a charitable deduction for your gift in the year in which the trust is formed. You then receive income from the trust for life, after which the assets pass to a philanthropic fund or charity that you designate. A Charitable Lead Trust fund provides for a regular, fixed amount to be paid to a fund or charities of your choosing for a specific number of years, after which the remainder of the trust passes to your designated heirs or other beneficiaries.
Establish a Giving Circle. Find like-minded people with whom you can pool funds and then distribute the income and/or principal in the form of grants. Members may chip in anywhere from $100 to $2,500 or more. The funds may be held at a public foundation or at some other nonprofit or commercial entity that will invest the funds to earn income. This setup also saves individual donors the cost of setting up their own private foundations.
Create a Family or Private Foundation. This allows your family to retain control and flexibility in its giving to specific organizations. The foundation can be organized as a nonprofit or charitable trust. You can deduct up to 30% of your annual adjusted gross income for cash donations and 20% for gifts of stock or property. By law, private foundations must pay out in annual grant funds totaling 5% of their assets and 1% to 2% excise tax on net investment income.
Develop a Corporate Giving Program. Many companies have an annual giving program to make grants (funded as part of their annual operating budget) and to match employees’ cash gifts and volunteer time to nonprofits. Companies often make in-kind gifts of products to charities. The tax deduction is 10% of pretax profits. If you have a family-owned business, you can establish a giving program or corporate foundation, which usually starts with a single donation that can become an endowment. The owners are usually the governing board, and the foundation is subject to the excise tax and minimum payout requirement.
Develop a Donor-Advised Fund Through a Public Charity. Donor funds allow you to make simple tax-deductible contributions. These funds are set up through a public foundation and are considered an alternative to establishing a private foundation since there are no fees or complex paperwork. You can designate one or more charities as beneficiaries. The financial decision on grant distributions rests with the board of trustees of the community foundation that manages your tax-exempt donor funds.
Establish a Supporting Organization. This entity lies between a private foundation and a donor-advised fund. Essentially, your organization supports and funds a public charity with a mission compatible with your values. Family members can sit on the governing board and participate in the grant-making decisions. There is no excise tax or payout requirement as with a private foundation.
Before you give to a nonprofit organization, make sure it is registered with the proper state or local government office.