As families grow in size and overall wealth, a desire to “give back” often becomes a priority. Cultivating philanthropic values can help foster responsibility and a sense of purpose among both young and old alike. At HCM, we spend considerable time with clients determining the best way to help their families meet their philanthropic goals.
To encourage charitable giving, the IRS permits a tax deduction for many gifts to qualifying charities if you either itemize or are required to take distributions from your IRA. Gifts of appreciated assets, such as shares of stock, can also help reduce capital gains and estate taxes. Here are four ways to incorporate charitable giving into your family’s overall financial plan.
Annual Family Giving
To establish an annual family giving plan, first determine the total amount that you’d like to donate as a family to charity. For those who want to squeeze the most tax benefit possible out of gifts, it pays to determine what impact your contributions may have on your marginal tax bracket. Next,
encourage all family members to research and make a case for their favorite nonprofit organization, or divide the total amount equally among your family members and have each person donate to his or her favorite cause and then share why they made their choice.
It’s important to research charities before donating to them to ensure that they serve a mission you support, they are good stewards of the donations they receive, and their efforts generate positive results. There are a number of useful online resources that can help with this research,
such as Charity Navigator, CharityWatch, or the BBB Wise Giving Alliance.
Charitable giving can also play a key role in an estate plan by helping to ensure that your philanthropic wishes are carried out while potentially reducing or eliminating your estate tax burden.
The federal government taxes wealth transfers both during your lifetime and at death. In 2021, the federal gift and estate tax imposed can be as high as 40% on transfers exceeding
$11,700,000. This deduction is expected to be cut nearly in half in 2026, so planning for the future is important. Some states also impose similar taxes but at much lower thresholds than the federal government.
Bequests through wills and trusts are useful tools for incorporating charitable giving in your estate plan, along with lead and charitable remainder trusts. Alternatively, you can designate an appropriate charity as a beneficiary for insurance policies or retirement accounts.
Donor-advised funds have become an extremely popular tax planning tool. They offer a way to receive tax benefits now, in higher-income years, when the tax benefit is greater and then make charitable gifts later. Your contributions are generally tax deductible when made to the fund. You (or a designee, such as a family member) then advise the fund on how those contributions will be invested and how grants will be distributed in the future.
Private Family Foundations
Private family foundations are similar to donor-advised funds but on a more complex scale. A private foundation may be most appropriate if you have a significant level of wealth and want to give to beneficiaries that are not permissible for donor advised funds. The primary benefit
(in addition to potential tax savings) is that you and your family have complete discretion over how the money is invested and which charities will receive grants. A drawback is that these separate legal entities are subject to stringent regulations and require significant annual administration.
These are just a few of the ways families can nurture a philanthropic legacy while benefitting their financial situation. For more information, contact your financial professional or an estate planning attorney.