Pleasanton Financial Advisors

A Simple Charitable-Giving Approach Is Sometimes Best

Charitable giving is an important part of most people’s lives. Often in the later retirement years, charitable giving becomes an increased priority, but it can provide significant satisfaction, income, or tax advantages when done correctly at any stage of life.

There are a variety of methodologies and vehicles available for charitable giving, ranging from simple to complex. We will address four popular approaches in a four-part series of articles in Financial Progress: simple giving, donor-advised funds, charitable gift annuities and pooled income funds, and charitable remainder trusts. Each methodology can be appropriate and advantageous when used correctly under the right circumstances.

When determining which method is best suited to your needs, a good place to start is to ask yourself, what is my main objective with this gifting? The answer to this question will help to guide your ultimate approach. Possible objectives include, but are not limited to: maximizing the amount of money going to the charity or charities of your choice, maximizing the tax benefits for you, establishing an income stream while you are still living, or simply making the gifts with minimum effort.

In this first article, we will address a basic approach that we call "simple giving." In this methodology you maintain assets earmarked for charitable giving in an ordinary taxable account and then gift the assets to charities whenever you so desire. This approach has three real advantages. First, it works for any dollar amount; no minimum is required. Second, the fees and expenses associated with this approach are by far the lowest of all. Compared to the other three approaches, there are no attorney fees or management fees above and beyond the expenses associated with the assets themselves. Third, and perhaps most important, it is simple.

The simple giving approach usually works best if your overall objective is either to minimize your effort or to maximize the gift you are giving to your charity or charities. Because of its low associated expenses, this methodology usually results in the charity ultimately receiving the highest dollar amount when compared to the other methods of giving. Simple giving does not provide you with an income stream.

The simple approach encompasses more than just writing checks or gifting cash. It can and often does include the gifting of other types of assets. Assets-wise, the approach is best for appreciated growth and/or income-producing stocks. Assets like these, which are taxed at a lower rate than cash or bonds, can be held for future gifting at low cost, thus allowing the donor to ultimately give the maximum amount to charity. Gifting appreciated stock is advantageous with any approach, as the donor avoids taxes on capital gains and can thus consider increasing the gift by the amount of the avoided taxes.

This approach is also better suited for donors who have a low marginal tax rate. At higher tax rates, a larger portion of the assets held for future donations are used to pay taxes, which ultimately drives the overall expense of this methodology up closer to that of the more expensive and complex approaches.

For other assets, objectives, and marginal tax rates, one of the alternative methodologies may be more appropriate. Keep in mind, though, that when using the other methodologies, there are always added layers of complexity and expenses. Most also have a minimum dollar amount that must be met. When selecting a methodology other than simple giving, then, you will want to be sure that it is the appropriate choice given your assets, marginal tax rate, and main objective.

Generally, charitable giving results in tax savings by means of deductions claimed on Schedule A of a personal income tax return. Only taxpayers who itemize deductions can get a tax benefit.

In our next article in this series we will examine donor-advised funds and discuss scenarios in which they might be appropriate for charitable giving.

The table below compares and contrasts the more popular methods of charitable giving according to several criteria. For four of the criteria, an X indicates satisfaction of the criterion. Expenses associated with each method vary in terms of total dollars and in terms of the number of expenses. A donor’s marginal tax rate, along with other factors, affects how much benefit each method will deliver.

Method	Simple	Maximizes Gift to Charity	Provides Income to Donor	Low Minimum(<$50,000)	Associated Expenses	Marginal Tax Rate Best for
Simple Giving	X	X		X	Low	Low
Donor-Advised Fund	X			X	Mid	Mid to High
Charitable Gift Annuity			X	X	Mid	Mid to High
Pooled Income Fund			X	X	Mid	Mid to High
Charitable Remainder Trust			X		High	High