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Feeling Philanthropic? A Charitable Planning Primer

Posted on: October 1st, 2021

Feeling Philanthropic? A Charitable Planning Primer

Do you want to have a major impact on a charity or cause that means a great deal to you? Do you want to do well financially by doing good for others in need? Do you want to leave your mark and maybe even “make a dent in the universe” as Steve Jobs once talked about?

If so, you’ve got plenty of company.

In our experience, one of the top five key financial issues we hear about from today’s affluent individuals and families is charitable giving—how to do it well, and how to do it better. And when we asked 247 highly successful business owners why they wanted to be wealthier, 71.3 percent—nearly three-quarters—told us they wanted to build additional wealth so they could be more meaningfully supportive of charitable causes.

We all know the best results usually come from the best plans—it’s uncommon to randomly stumble into a great outcome!

That also holds true when it comes to philanthropy.

Charitable planning defined

Charitable planning is the process of making a significant charitable gift, during your life or at death, that is part of a broader financial or estate plan and takes the bigger picture into account. In contrast, a single charitable donation made from your current cash flow this year may be a gift—but it’s not a planned gift as we define it.

Smart giving is usually best accomplished as part of your overall financial situation. By considering the various assets you have and how they are structured, you can plot out a path to results that are very worthwhile to all parties involved—including you, your family, your business (if you own one) and the charitable organization. To get those results, charitable planning is often coordinated with estate or income tax planning that uses advanced legal and tax strategies and/or financial products.

Eight ways to give

Philanthropy can take a number of forms. Generally speaking, charitable gifts provide you with a financial benefit on top of tax deductions—benefits that were put into the tax code specifically to encourage charitable giving.

The best first step in your planning efforts is to understand the charitable giving landscape, as there are many ways to accomplish charitable giving. For example:

Option #1: Will bequest

This is the simplest gift—and the one that is by far the most common among those who have already made a planned gift. Through a will bequest, you leave a charitable gift in your will, and the gift does not go to the charity until the will is probated.

A will bequest meets the personal needs of many people, and it does not require a great deal of involvement during your lifetime. Also, a will bequest does not require a lot of administrative oversight; the estate simply pays out the designated amount to the charity during the probate period. What’s more, will bequests are convenient because the assets are still available to you during your lifetime. Your estate is also able to take an estate tax deduction for the value of the charitable bequest.

Option #2: Private foundation

This is a private, nonprofit organization that receives most of its contributions from a single wealthy individual or family (usually very wealthy). With a private foundation, a minimum amount of the foundation’s assets must be distributed annually (currently about 5 percent).

Option #3: Donor-advised fund (DAF)

Think of DAFs as charities that invest in pooled investment vehicles similar to mutual funds. What you donate earns a federal income tax deduction for the entire gift, because the DAF is technically a nonprofit. You can, at your own pace, pinpoint certain charities and decide how much to give to each one. You can then request that the fund send a check to your chosen organization.

Option #4: Charitable trust

For many people with wealth and strong charitable intent, charitable trusts are extremely attractive planned gifts. There are two types of charitable trusts:

  • Charitable remainder trust. With a charitable remainder trust, the benefit to charity is delayed because income from the trust is reserved for you (as the donor) or some other person you specify. As part of the gift, the trust provides income for you for your lifetime or for a set number of years. Once the trust is terminated, one or more charities chosen by you will receive the assets that were held in the trust.
  • Charitable lead trust. In a charitable lead trust, you transfer assets to the trust for life (or a specific number of years), and the trust’s income is paid to your charity of choice. When the trust expires, the assets in the trust are either returned to you (or your estate) or passed on to heirs you designate.

Option #5: Supporting organization

A supporting organization is a charity that supports one or more other charities. Very similar to a private foundation, the supporting organization must be structured and operated exclusively for the benefit of (or to carry out the purposes of) one or more specific charities. Therefore, once the supporting organization is established and the charities it supports are designated, changes to the beneficiaries aren’t allowed.

Option #6: Charitable gift of life insurance

This approach to planned giving uses a traditional financial tool—life insurance—in an innovative way. As the donor, you designate a charity as the owner of your life insurance policy. Generally, you can take a tax deduction for the premiums and create a significant charitable gift.

Option #7: Charitable gift annuity

This is a contract between you and a qualified charity that exchanges your gift to charity for an annuity (or guaranteed lifelong income) to you. There is a modest income tax deduction for the actuarially determined value of the gift you pass on to charity. As a consequence, charitable gift annuities can be used to reduce capital gains taxes for gifts of appreciated assets—and also to reduce estate tax liability.

Option #8: Pooled income fund

A pooled income fund is akin to a mutual fund. The major difference is that the pooled fund is specifically for donors who give to only one charity. Donors contribute securities, cash or other acceptable assets to the pooled income fund, and the charity manages the assets in the fund. An income tax deduction is received for the actuarially determined value of the gift passing on to charity. Pooled income funds are used to help eliminate capital gains taxes for gifts of appreciated assets. Estate tax liability can also be reduced.

Charity first While charitable gifts can produce substantial benefits for donors, it is very important to remember that charity comes first in the equation. If tax mitigation is your only concern or your primary concern, other wealth management strategies separate from planned giving are likely to give you better results. 
The upshot: If you don’t sincerely care about meaningfully supporting any charities or causes, charitable gifts are probably not for you. If certain charities and causes are dear to you, however, philanthropy can be a very effective way for you to do something truly worthwhile for others while doing well for yourself financially.

The right resources to tap

Charitable planning is often facilitated by an array of professionals, including many working within charitable organizations. This is mainly due to practicality: There can be many moving parts to coordinating a giving effort because of the multiple parties involved—donors, charitable organizations—and the multiple goals that possibly are being pursued (charitable impact, tax mitigation, estate tax reduction, family legacy development and so on).

Taking a do-it-yourself approach to charitable planning and giving is possible—but the probability that you’ll miss something important that could impact your ultimate results can be very, very high.

The good news is that there are many high-caliber wealth managers, philanthropic advisors, private-client lawyers and accountants who can be very useful in helping you evaluate whether charitable gifts make sense for you—and which options may be ideal for your situation. The expertise of these professionals is especially valuable in helping you implement your giving strategy.

That said, a great many financial advisors are not knowledgeable, are not experienced or are not either when it comes to charitable planning. Consider Exhibit 1, which shows what financial advisors told us when we asked them a few years ago about their knowledge and use of some common charitable tools. Our informal follow-ups since then suggest that these numbers are still accurate.

Therefore, one of the smartest moves you can make is to get a second opinion—either about your current approach to charitable giving and how it is being managed, or about a particular planned giving strategy or product that you are now considering. 

Getting a second opinion before taking action is also a wise move even if you have taken action already but are a little unsure and anxious about the path you’re on. This gives you the opportunity to correct mistakes or use solutions and products that can do a lot more to help you accomplish your charitable goals—and have a major impact on a cause you care about.


This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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