Charitable giving

While the tax code provides significant incentives for charitable gifts and bequests, certain types of charitable transfers receive more favorable tax treatment than others:

• Lifetime charitable gifts are more favorable than gifts at death
• Charitable gifts to public charities are preferable to gifts to private foundations
• Gifts of appreciated property held long term are typically better than gifts of cash

Let’s look briefly at each in turn.

If you were to make a charitable bequest in your will of $1 million:

• That amount would qualify for the estate tax charitable deduction
• It would not be subject to estate tax

Not a bad result. If you gave the $1 million in cash to charity during your lifetime, this would be a better result:

• It would not be included in your taxable estate
• You would get a $1 million income tax charitable deduction, in effect reducing current taxable income and income taxes

The tax code treats charitable gifts to public charities (for example, churches, hospitals and schools) more favorably than gifts to private foundations (typically established by a single family or corporation):

• Lifetime gifts to public charities (with some exceptions) typically entitle the donor to a full fair market value deduction
• Gifts to a private foundation (other than cash or publicly traded securities) are typically limited to the donor’s basis
• Gifts of cash to a public charity are deductible at up to 60% of an individual’s adjusted gross income (AGI) in the year of the gift
• Cash gifts to a private foundation are only deductible at up to 30% of AGI2
• Gifts of appreciated property held long term to a public charity are deductible at up to 30% of AGI in the year of the gift, but only at 20% of AGI for a private foundation

Many individuals use cash to make charitable gifts each year. While quick and easy, gifts of cash are often suboptimal from a tax perspective.

Appreciated property held long term is, typically, the most attractive form of property to give to charity during a donor’s lifetime. Let’s look at an example:

• If you were to make a $1 million gift of cash to charity, you would get a $1 million dollar income tax deduction
• If, on the other hand, you gave a million dollars of low basis publicly traded stock that you had owned for more than a year, you would get a $1 million deduction, but you would also avoid tax on the built-in capital gain
• This effectively lowers the cost of the gift to the donor.

When in doubt, always give low basis publicly traded stock held long term to charity.

When considering which charitable vehicle is best suited to help you achieve your philanthropic goals, the answer may actually consist of a combination of two or more options. This is particularly true when it comes to private foundations and donor-advised funds, two of the most common forms of donor-involved philanthropy.

To support your decision-making, it can be helpful to think through the “why” behind your philanthropy before getting to the “what” or the “how.” Some foundational questions for consideration include:

• What do you care about? What is most important to you?
• Why are these issues important to you?
• Do you give out of passion, responsibility or obligation?
• Do you want to honor a loved one?
• Do you want to address a specific issue or protect something beautiful?

The “why” will help you to clarify and articulate your philanthropic purpose, and the “what” and the “how” will inform your philanthropic plan and help you determine how you want to allocate your contributions.