For each of our clients, the why behind philanthropy is a bit different. Some clients want to support their alma mater, some support environmental causes, while others fund research into diseases that impact a loved one. Many of our clients support multiple causes and organizations.
You and your family are the only ones who can determine which organizations should receive a portion of your life’s work. As wealth managers, our role is to help you decide how to give in the most efficient way possible. This thought process is at the heart of strategic philanthropy, a wealth management process that has three primary goals.
- to maximize the philanthropic impact that you make
- to capture every tax deduction and benefit that philanthropy provides
- to make philanthropy part of a broader wealth management strategy
Creating A Philanthropic Framework
Once you have an idea of how much you’d like to give, the first step is to determine how wealth should leave your personal balance sheet. This can be very simple, like writing a check, or much more complex, like providing grants through a charitable foundation. Strategic philanthropy really comes into play at this point, as the tax benefits vary greatly based on how your wealth is distributed.
We’ve helped many families navigate this process, and we wanted to share four of the most common strategies that we support. These are just the basic considerations for each strategy, and we invite you to connect with our team to receive a custom recommendation based on your philanthropic goals.
For stock, bonds, or mutual funds that have appreciated in value, you can “leverage” your giving by donating these assets directly to charitable organizations. This is “leveraged” because the organization receives the cost basis of your initial investment plus any market appreciation, and you don’t pay capital gains tax in the process.
Conversely, if you’d like to donate securities that have lost market value, it can be beneficial to sell the position, capture the capital loss, and write a check for the market value.
While there are tax benefits from donating securities, it is less tax efficient than the other items on this list, so it’s typically not our first choice. If you do decide to donate securities, be mindful of how this will impact the balance of your portfolio.
Using a Donor-Advised Fund
A donor-advised fund is effectively a charitable investment account. This fund holds individual securities and cash, and the value of the account can grow based on investment decisions and market performance. Like any other investment account, your wealth advisor can manage this fund.
In most cases, you receive an immediate income tax deduction when you establish a donor-advised fund and the account will grow tax-free moving forward. Establishing a donor-advised fund also simplifies the process and paper trail of philanthropy, as this one account can provide funding to every organization that you support. The donor-advised fund is tax-efficient and simple to organize, so it is one of the most popular strategies for the philanthropists that we support.
Starting a Charitable Foundation
While the tax benefits of starting a charitable foundation are attractive, most of our clients choose this path for other reasons: they want to secure their legacy within their community and pass along philanthropic ideals to the next generation.
The drawbacks of establishing a charitable foundation are administrative. You may need an accountant to manage the foundation’s finances and legal counsel to draft by-laws and grant agreements. The time required to manage a foundation can be significant, so consider whether your life has room for the commitment. If you are unsure, another strategy may be the best fit.
Creating a Charitable Remainder Trust
This is a less common strategy, but worth mentioning. A charitable remainder trust allows you to move assets into the trust and receive a partial tax deduction. Most importantly, for any assets that generate income (like real estate, bond funds, or dividend-paying stocks) you can designate beneficiaries to receive this income on a monthly, quarterly, semi-annual, or annual basis.
You, your children, charities, or even a donor-advised fund can be listed as beneficiaries and you get to establish rules surrounding these payments. After a predetermined timespan or the passing of beneficiaries, the remaining balance of the trust is distributed to charities of your choosing.
The information in this article is just a starting point, and we invite you to connect with the Relative Value Partners team to see how strategic philanthropy fits into your larger wealth management strategy. We’ve helped many families be more strategic with their philanthropic efforts, and we would welcome the opportunity to support you.
About the Author: Jeff Fosselman, CPA, CFP®, JD
With more than a decade of experience in the industry, Jeff Fosselman is instrumental in delivering financial planning strategies and counsel to high-net-worth individuals. As Senior Wealth Advisor for Relative Value Partners, Jeff provides comprehensive advisory services in estate planning, income tax planning, cash flows, asset allocation, and strategic philanthropy.
Information contained in this article is obtained from a variety of sources which are believed though not guaranteed to be accurate. Past performance does not indicate future performance. This article does not represent a specific investment recommendation.
No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from Relative Value Partners, LLC which can only be provided through a formal advisory relationship. Clients of the firm who have specific questions should contact their Relative Value Partners counselor. All other inquiries, including a potential advisory relationship with Relative Value Partners, can be directed here.