THE GOOD STEWARD S GUIDE

Transcription

1 THE GOOD STEWARD S GUIDE TO CHARITABLE GIVING From financial wisdom, better stewardship. SM should not be considered investment advice or a solicitation to buy or sell securities.

2 Sowing the Seeds of Goodwill Do you donate regularly to charity? If you do, you re not alone. According to Giving USA, Americans donated more than $335 billion to nonprofit charitable organizations in And most of those donations approximately $230 billion came from individuals. For many people, the bulk of their charitable donations come during the holidays, in response to emotional appeals for items like food, clothing and toys. In 2013, for example, more than one third of overall charitable giving happened in the last quarter of the year, with the highest percentage (17.5 percent) coming in December (source: Blackbaud). Without time to research the charity, or learn how its mission aligns with personal goals, spur-of-the-moment donors risk funding a disreputable organization, or perhaps worse providing hard-earned dollars to a charity whose mission conflicts with their values. At AMDG Financial, we believe charitable giving can play an important role in our clients financial stewardship. While a one-time donation may feel good, we encourage a lifelong strategy that includes charitable giving, to help individuals and families have an even greater impact on their community. Even though you don t have to be rich to incorporate charitable giving into your financial plan, the rewards may make you feel that way. Multiple studies have shown that charitable giving can increase emotional wellbeing particularly when the donor feels as if he or she has made a positive impact on others. And, with proper planning, you may also be able to reap additional benefits, such as significant tax savings and/or being able to pass additional assets on to your heirs. Our Good Steward s Guide offers some tips and thought-starters to help you understand your options for incorporating charitable giving into your life and financial plan. If you have questions, or would like to learn more about including charitable giving as a stewardship strategy, please feel free to contact us, at We d be glad to help. Best regards, Wayne B. Titus III CPA/PFS, AIFA Rick Aguilar MBA, CFA, AIF

3 Which Charity is Right for You? Would you support me in a walk across Kenya to raise money for AIDS orphans? It s Ted, the coworker from accounting who bought Girl Scout cookies from your daughter last spring. If you re like most people, you get requests for donations like this all the time from friends, loved ones, coworkers, and even complete strangers. But which charity is right for you? And how do you know your donation will truly make a difference? At a panel discussion on poverty in 2010, billionaire financier Warren Buffett explained how he chooses to invest his philanthropic dollars. When I buy businesses, it s the same as investing in philanthropy. I m looking for somebody who will get the job done and is in synch with my goals, he said. 1 Buffett advises people to start by clarifying what motivates them sound advice from someone who pledged in 2006 to give all of his Berkshire Hathaway stock to philanthropic foundations. Buffett s philosophy works, whether you plan to donate $1,000 or $1 billion. The key, however, is in determining what s relevant to you. When choosing a cause (or multiple causes) to support, how do you decide if a charity deserves a donation? One good way to explore these issues is through the IMPACTS test: I M P A C T S Is this an issue I care deeply about? In what mode does this issue fit? Is it an ongoing problem with a persistent need, or a crisis that could be resolved in a limited period of time? Which do I prefer? Do I have a personal affiliation with this cause? For example, did I receive treatment from this hospital, or a degree from this university? Do I feel loyal to this organization? Am I acting on behalf of, or in support of, loved ones, such as family or friends? Could this cause or charity help them in some way? Is this charity consistent with my sense of community? Will my city, or the world, be a better place if this charity achieved its goals? Is this, in fact, a tax-exempt organization that qualifies for a charitable write-off on my taxes? Does that matter to me? What is the scope of the impact this charity makes? Is it global, regional, local? Which is most important to me? Are its funding sources sustainable? 1

4 Do Your Homework As Warren Buffett told nonprofit leaders in 2010, You can have the greatest goals in the world, but if you have the wrong people running it, it isn t going to work. On the other hand, if you ve got the right person running it, almost anything is possible. How do you know whether the charity you choose has the right people running it? Websites like Guidestar.org or CharityNavigator.org can help. Both sites offer spending breakdowns that let you know whether a charity has a good or bad reputation. Ideally, look for charities with low overhead that devote the majority of donations to programs or services instead of fundraising or marketing. Depending on the cause you want to support (for example, cancer), you may find multiple charities to choose from, so you can afford to be selective. Make it a Family Affair! Involving children in charitable decisions can be a great way to get them thinking about financial stewardship. Invite family members to create a list of charities they d like to support. Then, together, develop an evaluation scale based on the IMPACTS criteria and grade each charity according to how well it meets your family s criteria. From the list, choose the top charities and discuss how the family can provide support. Remember, there are more ways to provide support than giving money! If the charity accepts gently used items, for example, your children might consider donating toys they no longer use, or clothing they no longer wear. If the charity holds events, like clean-up days or walkathons, the entire family may choose to participate. If you re not sure whether a charity is taxexempt, you can check its status with the U.S. Internal Revenue services at irs.gov. On the IRS website, search for EO Select Check to find a list of exempt organizations. You may discover that the international organization you d like to support does not hold tax-exempt status in the U.S. Ways to Give Once you ve chosen the charity or charities you want to support, and determined the level and frequency of support you would like to provide, it s time to think about the best vehicle for donating. Based on your life and financial goals, your financial adviser can help you determine the donation method that s best for you. Here are some of the more common ways people choose to fund their charitable giving: Appreciated Assets: Charities often go out of their way to make it easy to donate. At times the quickest way to make a donation is by check or credit card. But the quickest way may not be the best for you. If you can donate appreciated assets, such as property or stock you ve held for more than a year, you may be able to claim a tax deduction without having to pay a capital-gains tax. In the case of stocks, donating the stock to the charity enables the charity to sell it and take advantage of the full value. If you sell the stock yourself and write a check, you ll be subject to capital gains, reducing the amount you could potentially donate. Charitable Lead Trusts: Different types of charitable lead trusts exist, but each enables an individual to make a large gift to a charity, receive a tax break, and eventually be able to leave the trust s remaining assets to family members or another beneficiary. The owner of a charitable lead trust benefits by avoiding paying federal gift and estate taxes. For example, if you were to create a charitable lead trust, you could direct the trust s assets (which could be securities or cash) to be held for your favorite charity. According to your wishes, the charity would receive payments from the

5 trust for a number of years. When the trust ends, your beneficiaries would receive any remaining assets free of any federal gift and estate tax. Charitable lead trusts tend to be complicated and are most often used by high-net-worth individuals who wish to leave large sums of money to a charity. Charitable Gift Annuities: A charitable gift annuity (sometimes called a split gift ) enables the owner to provide a gift to a charity, and in return, receive a guaranteed lifetime income from that charity. Donors sign a contract with the charity and can transfer property, including cash, securities or real estate as part of the annuity. In exchange, the annuitant(s) receive cash payments and pay taxes on the income stream. The tax benefits for this type of annuity vary according to the age and number of annuitants at the time of the gift, but donors can expect an immediate tax deduction based on their life expectancy and the anticipated income they would receive. Charitable gift annuities also reduce capital gains tax liability for gifts of long-term appreciated assets. Upon the death of the annuitant(s), any remaining funds in the annuity would go to the charity. Donor-Advised Funds: A donor-advised fund enables an individual to realize the maximum tax benefits of charitable giving immediately, even if they haven t yet decided which charity or charities to support. Community foundations often operate these types of funds, but financial services firms also offer donor-advised funds, and theirs are some of the largest. These funds make it easy for individuals to contribute appreciated shares of stock, for example, receive an immediate tax credit, and then recommend grants made up of the assets to charities at a later date. There s no deadline for distributing the funds to a charity, so a donor may accumulate funds for long periods of time. Be sure to evaluate the underlying costs of the investment or administration so you can be sure your money is mostly passed on to your charity of choice and not used for overhead. Family Foundations: A vehicle typically used by wealthy families, a family foundation often derives its funds from members of a single family, but can also seek contributions from the public. Often, family members run the foundation as trustees. Setting up a private foundation enables a family to retain control of the foundation s direction, but it also requires ongoing monitoring and administration. One possible advantage of a family foundation is the ability to include younger generations or other family members who may not otherwise be involved. For those who aren t wealthy, it s easier and less expensive to involve the family in using donoradvised funds. Gift-Tax Exclusions: In 2015, individuals will be able to gift up to $14,000 each to relatives or friends (couples can give up to double that amount, or $28,000) without having to file a gift tax return. The gifts only become taxable once an individual has exceeded $5.43 million in gifts over his or her lifetime. (Spouses are entitled to a separate $5.43 million.) However, gifts to IRS-approved charities are tax-exempt, so individuals or spouses can make unlimited gifts without gift or estate tax concerns. Gifts covering another person s medical or tuition expenses are also tax-exempt, as long as the payments are made directly to the medical service or education institution. Life Insurance: Life insurance policies are another excellent method to contribute to charity. If you choose to name a charity as the beneficiary of your life insurance policy, and continue to pay the premiums, the beneficiary could end up with a much larger gift upon your death than you could have donated otherwise. There are two strategies to consider in this scenario: by keeping the policy in your name and naming the charity as the beneficiary, you can change beneficiaries at any time. However, if you gift full ownership of the policy to a charity, you would relinquish the ability to

6 change beneficiaries, but could instead gain a potential income-tax deduction. You can also deduct additional premium payments you make as charitable gifts on your income taxes. Liquidity Events: It s possible that you may receive a windfall during your lifetime. For example, you may decide to sell your business, which could have a major impact on your taxes during the year of the sale. To mitigate the tax impact, a business owner could park proceeds from the sale into a donor-advised fund or foundation, take an immediate tax write-off, and then determine over time which charities to fund. Another option is to create a charitable remainder trust to offset taxes in this year, and to pass remaining proceeds to heirs after the agreed-upon time. If you can t afford to give away all the proceeds, and still need a stream of income during your lifetime, you can donate the proceeds into a charitable gift annuity that will pay you a stream of income for life. When you die, the remainder would go to the charity. Non-Cash Items: Unwanted household items, such as furniture and furnishings, clothing, electronics, appliances, linens and other similar items in good condition can make great charitable donations and decrease the clutter in your home. The IRS provides guidelines for determining the fair-market value of your donation, as well as instructions for documenting your donation for tax purposes. Remember, household items do not include food, paintings, antiques or other art objects, jewelry and gems, and collections. You can learn more about non-cash deductions by reading IRS Publication 526 (downloadable at: This is one of the most under-used deductions available to taxpayers. Don t forget the gut-check fund. Creating a charitable giving plan doesn t mean you can t still set aside money to contribute to school fundraising projects, holiday bell-ringer campaigns, or the like. You may want to set aside a small amount in your monthly budget so you can donate cash as you wish. Keeping Organized Maintaining proper documentation of charitable gifts is paramount, especially if you plan to deduct those contributions from your income taxes. Be sure to get receipts from the charities that receive your donations and document noncash items donated to charities using the guidelines provided from the IRS. The IRS also offers instructions for substantiating charitable contributions on its website, at: If you are considering using more complex gifting strategies, the documentation requirements are greater, but worth it. Talk to Your Adviser With more than 1.5 million nonprofit organizations in the United States, it s easy to get confused about which ones are tax-exempt, which ones are reputable, and which ones are worthy of your donations. That s why it s important to develop a life-long plan with a trusted adviser who can help you navigate the appropriate rules, laws and other considerations you ll need to make when considering charitable giving. One of the most important parts of good financial stewardship is learning how to take care of the people and causes you and your family care about. Take time to protect the value of your donations by doing appropriate research, choosing the right donation vehicle and documenting your gifts, so you can continue to grow your charitable-giving potential.