Wealth Preservation Part 3: A Guide to Charitable Giving as a Wealth Preservation Vehicle
Families can both preserve their legacy and contribute to a better world with a charitable giving strategy. Here is how it works.
- Philanthropy is a complex undertaking for HNWIs, and involves many tools.
- It is vital to get beneficiaries on board with any charitable giving plans.
- There are resources out there to help, but most vetting of charities requires in-person research.
Charitable giving can make a significant impact on a wealth preservation strategy and a family’s legacy, plus allow them to do some good in the process. That impact can be significant, too.
High net worth investors are contributing more now than they did before the pandemic, for example, and more than 85% of donors held steady or raised their level of contributions – even amidst the economic uncertainties caused by COVID-19.
But philanthropy at a certain income bracket is more complex than simply writing an annual check. A greater potential for impact brings with it more tools and options to achieve those goals. There are many options to consider when planning a charitable giving strategy, whether it is a traditional donation of cash; a transfer of stocks, bonds, or mutual funds; or a longer-term relationship through a private family foundation.
This guide will cover everything you need to know about charitable giving from a wealth management and preservation standpoint.
Charitable giving strategies
There are both growth and wealth preservation components to many charitable giving strategy, especially for HNWIs. Keep the following principles in mind in order to maximize your charitable giving plan’s potential for positive impact.
- Review the basics of deductions.
The first step is to confirm that the organization receiving the donation is a qualified 501(c)3 non-profit. Then, be sure no goods or services have been exchanged to keep the donation 100% deductible. Get a receipt if the gift is for $250 or more, and consider an independent appraisal if the gift is tangible property (such as collectibles) or artwork worth more than $5,000.
- Be strategic.
Use a blended approach that includes cash (limited to 60% of adjusted gross income), appreciated securities (limited to 30% of adjusted gross income), or tangible property (limited to the amount paid or the current reasonable value, whichever is less).
- Use a charitable giving vehicle.
Vehicles such as a donor advised fund (DAF), a charitable remainder trust (CRT), or a charitable lead trust (CLT) can be useful in lieu of donating to a single non-profit. You may also want to consider a private foundation, which allows a family to support traditional non-profits as well as organizations that fall outside of the 501(c)3 structure. Such arrangements also provide the potential to deduct up to 30% of adjusted gross income for cash gifts and up to 20% of adjusted gross income for long-term appreciated publicly traded assets.
Once you have determined your vehicle, it is time to adjust your approach for maximum impact. Consider these strategies:
- Extended giving.
“Bunch” several years of gifts spread out over time into a single deduction. A donor-advised fund is ideal for this because it allows the flexibility to spread donations out over time while receiving immediate credit for them.
- Tax-loss harvesting.
Reduce taxable capital gains by selling underperforming stocks. Donate the proceeds from the sale and they become a charitable deduction. If capital losses from the year are greater than capital gains, deduct up to $3,000 from total annual income.
Qualified charitable distribution (QCD).
Donors over the age of 701⁄2 years old can reduce their taxable income by making tax-free gifts up to $100,000 to qualifying charities directly from their IRAs. These are not considered charitable deductions.
These are just some of the tools investors can use to ensure their charitable giving reaches as far as possible. The right approach matters to maximize your wealth preservation plan, but you must also ensure that the next generation understands your vision for it.
Getting your beneficiaries on board with your wealth preservation goals
Nearly half of HNW investors work with family members to craft their charitable giving strategy, with 88% enlisting a spouse or partner into the process. But the key to preserving long-term success is having buy-in from beneficiaries — the children and grandchildren who stand to inherit the wealth, and the responsibility that comes with it.
It pays to establish transparency and healthy communication around the family’s charitable work. Here are some techniques to help bring everyone on board:
- Explain the family’s charitable decisions.
Children may not immediately grasp the finer points of why funds have gone to this recipient instead of that one. Walk them through the larger ideas behind these decisions.
- Engage them in the family story.
Wealth management goals are not just about money. They are also about legacy, the story the family will tell for generations to come. How do these charitable donations strengthen the family legacy? What will the family be known for in 20, 50, or 100 years?
- Let them ask questions.
Beneficiaries may not be fully engaged right away, or fully on board once they are in the loop. Give them time to come around and ask questions.
- Get everyone involved.
Walk through how the family’s resources are structured and used. Consider even setting aside a small pool of money for the kids to use for their own philanthropic passions. Encourage them to do the research, monitor the funds, and report back on their impact.
Transparency helps ensure that future generations of sons and daughters believe in the same causes as their forebears. That, in turn, assists in keeping your family’s legacy intact for years to come.
Additional resources and next steps
Once a family decides to adopt a charitable giving strategy, the next step is deciding where the money should go. Online resources such as Charity Navigator and Guidestar are good places to start, but a more detailed, personal, vetting process will likely be needed to thoroughly evaluate potential recipients.
Here are a few questions to ask to help investors make informed choices:
- Is there a personal connection to the organization’s mission?
- What are the organization’s outcomes? How many people has it helped? Can that be easily measured?
- Is the organization transparent with its finances? How do expenses line up with the budget?
- Is leadership accessible? What kind of staff turnover has there been? How will the donation be used?
- Who is on the board and what role do they play in the organization’s mission?
- What are the first impressions after visiting/volunteering for the organization?
Consider seeking out other major donors and asking about their experience. They have already gone down this road, after all, and will likely be helpful guides in getting to know the organization.
The right advisor
Philanthropy can be one of the most potent tools at a wealth manager’s disposal and deserves the same time and respect as any other strategy. An advisor can be helpful in determining how best to tackle the philanthropic arm of a wealth preservation and management strategy, as well as how to bring the younger generations along for the ride.
Advisors from Lindberg & Ripple are here to help put charitable giving plans into action. Get in touch with the team for a solution tailored to your individual needs today.
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