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Transferring your legacy

Charitable Giving: 4 Tax-Efficient Strategies

18 Minute Read

There are numerous ways to contribute to the charitable causes you support that match your philanthropic values, your pocketbook, and your goal of trimming your tax bill. Writing a check is still the most common form of philanthropy worldwide—and for many this means writing a flurry of them in December to get the tax break for that year.

We focus on helping our clients develop and implement their wealth planning strategies which includes charitable and philanthropic endeavors as part of our High-networth multigenerational focal point.

Jason Liu, Head of Wealth Planning

But for those with both the commitment to ongoing giving and the resources to fund that commitment, there are more formal strategies designed to give back with surprisingly generous tax breaks, including potentially sizable reductions in income tax, as well as estate tax and even capital gains tax.

Following we highlight four of the most popular gifting vehicles to help you better decide which might be right for you prior to the end of the 2019 tax year. An at-a-glance comparison of key features for these strategies can be found at the conclusion. For further guidance, we strongly recommend you consult with your wealth and tax advisors to determine which strategy best fulfills your charitable goals.



1) Donor Advised Funds (DAFs)

Generations defined
Source: Pew Research Center, "How Millennials today compare with their grandparents 50 years ago," 2015.


From a cluster of significant tax breaks to the opportunity to pass along a legacy of giving to the younger generations of your family, donor advised funds (DAFs) can add flexibility to a comprehensive financial plan. Of the four gifting vehicles discussed here, they offer the greatest simplicity— professional management, streamlined process, ease of use, and attractive cost- and tax-efficiencies.

They also offer the unique advantage of allowing the donor to select the charities they want to support and the timing of their gifts to those charities. This makes DAFs a particularly good way to involve younger generations in philanthropy. Research shows that Millennials, born roughly between 1980 and 1996, give differently than older generations. They want the control to choose not just causes in general, but particular charities that inspire them. For example, let's say that, like their parents, they choose to support the cause of child hunger. Unlike their parents, though, they would be more likely to want to direct their support only to particular charities that have special meaning for them.






How DAFs work

A donor makes an irrevocable contribution to a qualified public charity fund, which owns and manages all assets gifted to the DAF. Similar to a mutual fund, this sponsoring charity then pools the contributions of all donors and makes grants to the donor's selected charities once determined by the donors.

It is important to understand that, although donors are responsible for selecting charities to receive funding, the sponsoring charity has a strong  about which grants are actually made. They also have regulatory rules, such as they may not be able to donate to overseas charities and private foundations.


Tax advantages

Especially beneficial in years when you have a big bump in taxable income, contributions to a donor advised fund are tax deductible in the year they are made—and the limit on deductibility is generous. Effective with the Tax Cuts and Jobs Act of 2017, a donor can deduct cash gifts up to 60 percent of their adjusted gross income (AGI) in the year of the gift, and carry forward any disallowed deduction for five additional years thereafter.

Appreciated assets, held for at least 12 months, can also be donated, but the deductibility limit is lower than cash (up to 30 percent of AGI). The good news is that the deductibility limit for an appreciated asset, generally limited to contributions of publicly traded securities and mutual funds, is determined by its current value, not its cost. So, if the cost basis of an appreciated asset is low, the donor receives a double benefit: a larger tax deduction and no capital gains on the asset's appreciation.

DAFs also offer excellent estate-planning opportunities. Assets contributed permanently to a DAF leave the donor's estate, so are not subject to estate taxes.


2) Private Non-Operating Foundations

One effective way to create a family legacy of giving is by forming and operating a Private Foundation, which can be set up in perpetuity and managed over multiple generations.

Private foundations have proven to be incredibly successful engines of positive change over time, helping to bring us everything from Sesame Street to the 911 emergency system. And their transformative work continues.

The trust can be set up now, so the donor can take an immediate income tax deduction, and drawing income can be postponed until later. By then, if well managed, the trust assets could appreciate considerably in value, resulting in more income for the donor.

Ultra-High-net-worth families value the ongoing advice we share for effective family philanthropy, especially navigating and understanding how the new tax law changes impact their bequest.

Min Yoo, Senior Wealth Strategist


How private foundations work

Private foundations are similar to Donor Advised Funds in that the donor may make gifts to a private foundation and deduct the gift in the year of contribution up to certain limits. Unlike DAFs, however, Private Foundations allow the donor to retain greater control over the donated assets prior to the ultimate contribution to charity.

Not unlike starting a family business, private foundations are the most difficult to administer of the four gifting strategies we cover here. But such complexity can prove a positive characteristic when it comes to involving younger generations. Donors can engage children and grandchildren in roles as directors and investment advisors for the foundation, allowing them to make decisions as to which charities to benefit on an annual basis.

In addition, just as a private family business stays under the control of the owner, the private foundation board, usually the donor and members of the donor's family, maintain the right to manage the foundation in furtherance of its charitable mission as defined in the foundation's Bylaws, Articles of Incorporation or its governing trust document. Even defining the charitable mission of the organization can be a powerful bonding exercise for families with charitable intent. By organizing as a Private Foundation, federal and state laws obligate boards to follow strict compliance requirements, take on management responsibilities, and accept the liability exposure and any associated expenses that might result if these laws are not complied with.


Tax advantages

Donations to a private foundation are deductible in the year they are contributed. This can be significant, especially for individuals who have not yet determined the organizations they would like their contributions to support. Donors can lock in their tax deduction for the current tax year, while the actual charitable gift payout can be executed over time.

As with donor advised funds, private foundation donors can get a double tax benefit. In addition to a 30 percent deductibility limit for cash contributions to the foundation, donors can further reduce their taxable income up to 20 percent of AGI through the donation of appreciated assets. If the asset donated is a publicly traded security and has been held for more than one year, the deduction is based on fair market value. If the asset is property other than a publicly traded security or has been held for less than one year, the deduction is limited to the donor's cost basis.

No capital gains are realized when appreciated assets are donated to a foundation. In addition, assets contributed to a private foundation are excluded from the donor's estate and, as a result, are not subject to either federal or state estate taxes. For high-net-worth individuals who have a strong charitable interest, private foundations offer an opportunity to avoid paying estate taxes while simultaneously creating a lasting philanthropic legacy in the name of their family.


3)  Charitable Remainder Trusts (CRTs)

A CRT provides an income stream to the donor or the donor's assignees, for a defined term or for the donor's life. At the termination of the trust, the remainder is passed on to a qualified charity or charities.

One of a CRT's key advantages is that it allows the donor to defer the capital gain of an appreciated asset in whole or in part, while retaining an income stream for life or a fixed period of time. A donor is entitled to a charitable income tax deduction in the year the CRT is created. Additionally, the asset is removed from the donor's estate, so no estate taxes are due on any assets remaining in the trust at the death of the donor.


How CRTs work

The donor transfers an appreciated asset like stock or real estate into an irrevocable trust. The trustee then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets. For the term of the trust, the trust pays an income stream to the donor and the asset is removed from the donor's estate. At termination, the remaining trust assets go to the charity or charities the donor has chosen.

The trust can be drafted with flexibility based on the donor's cash flow needs. Tax rules do require the trust to distribute a minimum amount to charity each year.


Tax advantages

CRTs can be funded with cash securities or other assets. For tax purposes, initial funding is valued at fair market value (i.e., traded securities are valued at stock market value on contribution date). Other assets, such as shares in closely-held businesses or rental property, require an appraisal.

The amount of the tax deduction allowed for creating a CLT depends on a number of factors, including the type and value of the asset and the age of the donor receiving the income. But generally, the higher the payout rate, the lower the income tax deduction.

The deduction is generally limited to 30 percent of adjusted gross income, but can vary from 20 to 60 percent depending on how the IRS defines the charity and the type of asset. If the donor cannot use the full deduction the first year, they can carry it forward for up to five additional years.

To get the greatest tax benefit when funding a CRT, the best assets to use are those that have greatly appreciated in value since the acquisition date (i.e., publicly traded securities, real estate or stock in closely-held corporations). When the trustee sells the appreciated asset to fund the CRT, it recognizes no capital gains tax. And, since the asset leaves the estate, no estate tax accrues to the donor's estate.


4)  Charitable Lead Trusts (CLTs)

A charitable lead trust (CLT) is a smart strategy for charitablyinclined donors who wish to experience the impact of giving during their lifetimes, have no need for the income produced by assets, and anticipate estate and gift tax liability upon the transfer of their wealth. Assets used to fund a CLT are removed from the donor's estate, reducing the amount of tax the estate has to pay upon the donor's death and preserving all or a portion of the trust principal for designated heirs.

A CLT provides an income stream to one or more qualified charities for a designated period of time or for the life of the donor, with the remainder of trust assets staying in the family, either returning to the donor or passing to other non-charitable beneficiaries.

Donors determine the term of the trust and the amount distributed, at least annually, to charity. On the downside, the charitable payment must be made regardless of whether there is sufficient trust income available, or not.

Each client has unique charitable goals. We work together to design a customized strategy to achieve those objectives, considering the clients' desired legacy and tax efficiencies.

Charity Falls, Senior Wealth Strategist


How CLTs work

A charitable lead trust is designed to make distributions to one or more charitable organizations during the designated term of the trust with the remainder passing to the donor or other non-charitable beneficiaries at the conclusion of the term.


Tax advantages

Aside from being a great way for a donor to leverage their generosity during their lifetime, the primary motive for choosing a CLT is to remove the asset sold to fund the trust from the donor's estate, reducing the amount of tax the estate has to pay upon the donor's death and preserving funds for designated heirs.

At a glance: comparison of key features

Fund Feature
Donor Advised Fund (DAF)
Private Foundation
Charitable Lead Trust (CLT)
Charitable Remainder Trust (CRT)
How difficult to administer
Easy to administer
Moderate difficulty
Moderate difficulty
What are the deductibility limits on gifts of cash or publicly traded securities
Cash: 60% AGI; Securities: FMV up to 30% AG
Cash: 60% AGI; Securities: FMV up to 20%
Grantor CLT only: Public Charity: 30% AGI; Private Foundation: 20% AGI. No deduction for Non-grantor CLTs
If "to charity": Cash: 60% AGI; Securities: 30% AGI If for "use of charity," then 30/20%
What are deductibility limits on gifts other than cash and publicly traded securities
Fair Market Value (up to 30% AGI)
Cost basis (20% AGI)
Grantor CLT only: Public Charity: 30% AGI; Private Foundation: 20% AGI. No deduction for Non-grantor CLTs
Fair Market Value (up to 30% AGI)
Can estate taxes be reduced

We can help

For over 150 years, Union Bank® has been helping charitably minded individuals and families meet their financial and philanthropic goals and short- and long-term tax needs. We offer a dedicated group of Charitable Services specialists, skilled at responding to your questions and concerns, providing customized solutions, and working with you to design a comprehensive plan that fulfills your vision and values.

Working with you, we will integrate charitable planning into your overall financial plans to ensure that you, as a client of The Private Bank, and your loved ones are cared for during your lifetime and beyond. There are many options available, and each provides different tax, charitable, and personal benefits. We can help you make the choice that is right for you and your family and assist with implementing your plan with sound financial and fiduciary management.

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This material is intended solely for informational and educational purposes, and is not intended for use as the basis for legal or tax advice or to be considered an opinion and does not contain a full description of all facts or a complete exposition and analysis of all relevant circumstances.

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