Charitable Giving, Part 2: Which Charitable Vehicle is Best for You?

By Andi McNamara, CFP^®
Vice President, Director of Financial Planning
Washington Trust Wealth Management

With the fall fundraising season approaching, now is the time to choose a charitable giving vehicle that makes the most of your philanthropic dollars and best fits your overall goals. In the first of two blogs (Read Part 1 here), we explained your available charitable vehicle options. Here, we compare their advantages and disadvantages and why you may want to choose one over the other.

In choosing a charitable vehicle, it’s important to understand your goals beyond the giving itself. For some people, charitable giving may be a means of socializing or professional networking, with the costs of donations and tickets to charitable events budgeted as part of entertainment or professional development. And beyond the tax benefits, your decision may need to address factors important in your life, including control, privacy, and ease of creation. 

Cash Donations

• Advantages: Cash donations are the simplest and most straightforward way to give. You can claim a deduction up to 60% of your Adjusted Gross Income (AGI), which can provide substantial tax benefits if you itemize your deductions.
• Disadvantages: While easy, cash gifts may not offer the same level of tax efficiency as other options like appreciated stock or retirement assets, which can allow you to avoid capital gains taxes. And while cash gifts have an immediate impact, they lack the long-term control that other vehicles offer.
• When to choose: Cash donations are ideal when you want immediate impact and simplicity. It’s also great for smaller, one-time gifts or if you prefer to give directly to charities without complex planning.

Donor-Advised Funds (DAFs)

• Advantages: A DAF allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charities over time. You can contribute a variety of assets, including cash, appreciated stocks, or even non-publicly traded assets. DAFs are flexible, easy to set up, and maintain, and they provide anonymity if desired.
• Disadvantages: Once assets are placed in a DAF, they cannot be withdrawn for personal use, and you surrender control of the assets. DAFs are also subject to management fees, and you cannot fulfill personal pledges with them.
• When to choose: DAFs are a great choice if you want a flexible, long-term giving strategy without the administrative burden of a private foundation. You can receive immediate tax benefits while distributing funds over several years.

Private Foundations

• Advantages: A private foundation provides the most control over charitable assets. You can set your own mission, hire staff, and even compensate family members. You have the freedom to grant to individuals, fund research, or run your own programs. Foundations also offer prestige and can create a lasting legacy.
• Disadvantages: Setting up and maintaining a private foundation can be complex and costly, with strict regulatory oversight. Generally, approximately 5% of fair market value (FMV) must be distributed every year. Annual tax filings and distributions are required, and contributions are limited to 30% of AGI for cash gifts and 20% for appreciated assets. The administrative burden and compliance requirements are significant.
• When to choose: If you want total control over your charitable giving, have a long-term philanthropic vision, and are prepared for the associated administrative work, a private foundation may be the right fit.

Charitable Trusts

• Charitable Remainder Trust (CRT):
  • Advantages: With a CRT, you or another beneficiary can receive income for life or a term of years, with the remainder going to charity. This vehicle allows you to reduce estate taxes, diversify concentrated positions without immediate capital gains, and create income streams. It’s also an effective tool for estate planning.
  • Disadvantages: Once the CRT is funded, you can't reclaim the assets, and the trust is irrevocable. It also requires careful setup and management, which incurs costs.
  • When to choose: A CRT is ideal if you need income but also want to leave a significant charitable legacy, especially if you have appreciated assets you’d like to diversify tax-efficiently.
• Charitable Lead Trust (CLT):
  • Advantages: A CLT allows charities to receive income from the trust for a period, after which the remaining assets are passed back to either the donor or a non-charitable beneficiary, the opposite of a CRT. It helps reduce estate taxes while ensuring that your family benefits in the long run. It's especially useful for passing wealth to future generations with lower transfer taxes.
  • Disadvantages: Like CRTs, CLTs are irrevocable, and setting one up requires legal assistance and ongoing management. The tax benefits can vary depending on interest rates and other factors.
  • When to choose: A CLT is suitable if you're focused on reducing estate taxes and passing wealth to heirs while also benefiting charities in the short term.

Stock 

• Advantages: Donating appreciated stock can provide significant tax savings. You can avoid paying capital gains taxes and receive a charitable deduction for the full fair market value of the stock, up to 30% of your AGI. This can be a tax-efficient way to give if your investments have appreciated significantly.
• Disadvantages: Some smaller charities may not be equipped to accept stock donations, and you’ll need to work through a financial advisor or brokerage to complete the transaction.
• When to choose: Stock donations are perfect if you have highly appreciated securities and want to maximize your tax benefits while supporting charity.

IRAs

• Qualified Charitable Distributions (QCDs):
  • Advantages: If you're over 70½, you can donate up to $100,000 directly from your IRA to charity, satisfying your Required Minimum Distribution (RMD) without having to include the distribution in your taxable income. This can reduce your taxable income and keep you from being pushed into a higher tax bracket.
  • Disadvantages: QCDs are capped annually, so this strategy is limited in scope. It also applies only to IRA holders who meet the age requirement.
  • When to choose: QCDs are ideal for those looking to reduce their taxable income in retirement while satisfying their RMDs in a tax-efficient way.
• IRAs as Inheritance:
  • Advantages: Leaving an IRA to charity at your death can provide significant estate and income tax savings. Since charities don't pay taxes on distributions, the full value of the IRA goes to the charity, while heirs avoid potentially high tax liabilities.
  • Disadvantages: Heirs won’t receive the funds if they’re earmarked for charity, and once designated, it can be challenging to adjust the strategy.
  • When to choose: Using IRAs for charitable bequests works well if you want to leave other assets to your heirs and support charity in a tax-efficient way.

The right charitable vehicle depends on your goals, the assets you wish to donate, and the level of control you want. Each option has its unique advantages, so consider how they align with your broader financial and philanthropic strategy.

Rely on Washington Trust Wealth Management 

As a community-focused organization, Washington Trust Wealth Management is here to answer your questions and provide guidance to help your donations mean more, go further, and align with your financial goals, tax situation, and philanthropic vision. Talk to your wealth advisor today.