It's that holiday time of year and most of us are focused on giving back - whether that means picking out presents for friends and family, volunteering in our communities or making charitable donations.
In 2016, American individuals, estates and foundations contributed an estimated $371.5 billion to U.S. charities, according to a report by Giving USA. That was an increase over 2015 and only the sixth time in the past 40 years that giving in all major categories – from religion to education, human services, the arts and more – rose across the board.
But how can you ensure that your charitable donations are being used in the most effective way possible?
Find a qualified charity
Cathy Walker, a senior trust consultant at RBC Wealth Management, said the first step is to ensure that your donation is going to a qualified charity: A nonprofit organization with tax-exempt status granted by the IRS.
“If I were making a donation directly to an animal shelter, I would want to make sure the animal shelter itself is in good standing with the IRS," Walker said. “Make sure they're doing what they're supposed to be doing – are they spending too much money on marketing and support or are they spending more of their money on actually taking care of the animals?"
Once you've established that the charity aligns with your philanthropic goals, decide which tools will best help you retain control over how your donation is used, as well as ensure that you are meeting your wealth management and tax strategy goals.
Here are a few options:
Launch a Charitable Lead Trust
A Charitable Lead Trust (CLT) allows a donor to give a portion of the trust income to a charity over a specified period - typically the donor's lifetime, or a set number of years.
Through the CLT, the donor can take either a gift tax deduction or an estate tax deduction. After the specified period ends, remaining assets may be returned to the donor or passed on to other family members.
“The benefit here is they're controlling how much money the charity gets over a period of time," said Mike Dowling, senior vice president and manager of City National Bank's personal trust division in Los Angeles. “Most charities will honor your request on how the money should be spent."
Establish a Charitable Remainder Trust
A Charitable Remainder Trust (CRT) is the opposite of a Charitable Lead Trust, Dowling said. A CRT receives gifts of cash or other property on behalf of a qualified charity.
It allows the donor, along with other family members, to receive a lifetime payment from the trust, or a payment for a fixed term of no more than 20 years. When the income beneficiaries die, or when the term ends, the remaining assets are passed along to the charity.
“It's an irrevocable trust - meaning it can't be changed (by the donor)," he said. CRTs provide immediate income tax deductions and defer capital gains taxes when assets are sold within the trust. Once the donation has been made, it is up to the trustees and the beneficiary to determine how the money is used.
Set up a family foundation
For high-net-worth individuals, setting up a private foundation can be an effective way to influence how charitable assets are used.
“(Often, the client has) taken care of their children during their lifetime (and) now wants to create a legacy that goes on for generations," said Dowling. Under IRS guidelines, private foundations must pay out at least 5 percent of their assets each year in the form of grants and operating charitable activities.
Private foundations can target any sort of purpose and are often administered by directors and trustees, whose task is to ensure that they are executing the donor's vision.
Create a Donor-Advised Fund
A few years ago, Walker had a client who wanted to donate a large sum to a teaching hospital. “They were doing research on something he was personally very connected to, that he felt very strongly about," she explained.
The donor was set to transfer $2.5 million in securities to the hospital before Walker stopped him, pointing out that handing over a lump sum could mean giving up control of his donation.
If the researcher he wanted to support left that hospital, Walker explained, he would have no say in how his money was used. In fact, that is exactly what ended up happening - but fortunately the philanthropist had taken Walker's advice and set up a Donor-Advised Fund (DAF), allowing him to make payments annually to support the research about which he felt so strongly.
DAFs are set up as public charities, with gifts to the fund qualifying for the maximum charitable deduction. Unlike a foundation, which usually funds with a minimum of $5 million, DAFs can be established with $5,000 or even less.
“I call it 'foundation light,'" said Dowling. “You don't have to set up anything: The donor-advised fund does all the work and all the reporting."
Giving is all about sharing the wealth, Walker said, pointing to her client who backed the medical researcher.
“Hopefully, after two or three years they find the answer that they're looking for," she said. “And then maybe he wants to support another organization. He's not tied to giving to one specific charity - he maintains the ability to make grants where he chooses and in amounts that he feels are appropriate."
Brokerage and investment services offered through RBC Wealth Management, a division of RBC Capital Markets, LLC, member FINRA/NYSE/SIPC, and an affiliate of City National Bank. Products and services offered through City National Bank are not SIPC insured.
City National Bank (CNB) is an affiliate of RBC Wealth Management and an indirect wholly owned subsidiary of Royal Bank of Canada. City National Bank its affiliates and subsidiaries, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented taking into account your own particular circumstances.
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