During the COVID-19 crisis, many of us are wondering what we can do to help. If you are considering making a charitable gift to help those affected by the pandemic (or any other cause important to you), read on to learn how you can maximize the impact of your contribution depending on what and how you give.
What to Give
Donating cash is a simple approach and does not require much advanced planning. Charities are facing rapid and unpredictable changes as a result of the pandemic, and some may prefer cash donations that can be put to work immediately to help provide resources and services to those in need. Additionally, the CARES Act created incentives for some donors to give cash. Individual taxpayers are now able to deduct charitable contributions up to 100% of their adjusted gross income (up from a 60% limit), and corporate taxpayers may deduct contributions up to 25% of their taxable income (up from a 10% limit). In order to incentivize giving that will have an immediate impact, these increased limits only apply to cash contributions to public charities or private operating foundations (they do not apply to contributions to donor-advised funds).
If you are looking to leverage your charitable gift, consider donating appreciated securities. Rather than selling those securities, paying capital gains tax and then donating the leftover cash to charity, you can maximize your gift by making an in-kind donation of those appreciated securities. You will not be subject to capital gains as a result of the transfer, and the charity will be able to sell the securities tax-free.
You may also give complex assets, such as an interest in a private business or real estate, to charity. This can be an effective technique if you are considering selling the asset and are looking to minimize income taxes. The charity would sell its portion tax-free, while you would only pay capital gains tax on the interest you retained.
Finally, though a qualified charitable distribution from your IRA (a distribution up to $100,000 you direct to be made from your taxable retirement account to a 501(c)(3) charity) is typically an effective way to benefit charity while lowering your tax bill, required minimum distributions are waived in 2020 as a result of the CARES Act, so this method of giving may be less attractive this year.
How to Give
One of the easiest ways to give is a direct contribution to your charity of choice. You can write a check or work with your financial advisor to wire appreciated securities directly to the organization. Gifts of complex assets, such as an interest in a private business, require more planning, so you may want to consult with your Brown Brothers Harriman (BBH) wealth planner ahead of time.
Another way to give is to establish a private foundation or donor-advised fund (DAF). These entities are a great way to create a philanthropic legacy and get your children or other family members involved in your charitable mission. While both private foundations and DAFs make grants to charities, there are key differences with respect to control over the grantmaking process and administration.
Private foundations are set up as trusts or charitable corporations, so if the grantor serves as a trustee or director, he or she will direct the distributions made by the foundation each year. Furthermore, the governing documents can be tailored to a specific charitable mission, allowing for some control even when the grantor is no longer involved in the foundation. DAFs are administered by public charities, and the grantor serves as an advisor. In this capacity, the grantor suggests grant recipients, but ultimately, the decision lies with the fund administrator.
Private foundations come with a greater administrative burden than DAFs, including filing annual reports and tax returns. They are also subject to minimum distribution rules, which generally require that at least 5% of a foundation’s assets be distributed to charity each year. DAFs are not subject to these rules, providing for more flexibility. DAFs also allow grants to be made anonymously, which is not an option with private foundations, whose tax returns are available to the public.
Finally, a split interest trust, such as a charitable remainder trust or charitable lead trust, is a good option for those looking to benefit charity while also shifting some assets to family members or even retaining an income stream for themselves. These are irrevocable trusts that are split into an income interest, which is for a set term of years, and a remainder interest, which is the balance of assets at the end of the term.
Charitable remainder trusts provide an income stream to the grantor or other individuals designated by the grantor, and at the end of the term, the remainder is distributed to a charity. Charitable lead trusts benefit charity first, with the remainder distributed to or held in trust for the benefit of individuals designated by the grantor, usually family members. With each option, the grantor may decide which charity (or charities) to benefit.
Gifts may qualify for charitable deductions to offset your ordinary income for the year. Keep in mind that income tax deduction limits vary depending on what type of asset you donate and to which type of charitable organization or entity you donate, so be sure to consult with your accountant before making a gift.
If you would like to learn more about maximizing the impact of your charitable gifts during this time of need, please reach out to your BBH relationship team.