Charitable giving is a way to help others in need, contribute to worthwhile causes and add meaning and depth to our lives. One thing I enjoy about my profession is being able to work with people to create a financial plan that helps them live well and give to others.
For those who have the opportunity to be involved in charitable giving, here are three variables to consider so that your charitable giving has the greatest impact:
1. Make Charitable Giving Part of Your Total Financial Plan
To decide what and when you are going to give, charitable giving first needs to be a part of your total financial plan. Remember what the flight attendant always tells you as part of the safety instructions before takeoff: “In the event of an emergency, fit your own oxygen mask first before helping children and others.” If you pass out from lack of oxygen, then you are not going to be able to help anyone else. The same applies to charitable giving. (For more, see: Charles Schwab: Tips for Charitable Giving in 2018.)
The people who are able to give most generously over their lifetime are those who have a plan to do so. Giving has to be done in a way that makes sense and is sustainable for you. For instance, if you have a high level of debt and are living paycheck to paycheck, you will be very limited in how generous you can be. But if you follow a financial plan to become debt free and to build resources for the future, you will be able to give much more freely.
2. Use the Best Charitable Giving Vehicles
It is important to know the best ways to give charitably to have the biggest impact. A high proportion of charitable giving is made up of simple cash gifts given in response to appeals. People hear about a need and they write a check. This is honorable and a lot of good work is funded this way. There are, however, some far more effective ways to give. Here are some tools to consider:
- Donor-advised fund (DAF): The National Philanthropic Trust provides this explanation: "A donor-advised fund, or DAF, is established by a public charity. It allows donors to make charitable contributions, receive an immediate tax benefit and then recommend grants from the fund over time. An easy way to think about a DAF is as a charitable savings account: a donor contributes to the fund as frequently as they like, the funds are invested to grow, and then the donor can recommend grants to their favorite charity when he or she is ready."
- Charitable remainder trust (CRT): According to eeCPA, a CRT lets you convert a highly-appreciated asset, such as stock or real estate, into lifetime income. It reduces your income taxes now and estate taxes when you die. You pay no capital gains tax when the asset is sold, and it lets you help one or more charities that have special meaning to you. How does it work? You transfer an appreciated asset into an irrevocable trust. This removes the asset from your estate, so no estate taxes will be due on it when you die. You also receive an immediate charitable income tax deduction at appraised at fair market value. The trustee then sells the asset, paying no capital gains tax and re-invests the proceeds in income-producing assets. For the rest of your life, the trust pays you an income. When you die, the remaining trust assets go to the charity (or charities) you have chosen.
- Private foundation: A foundation enables a donor to express the charitable wishes of the family in perpetuity. Since a private foundation is a charitable organization, it is exempt from federal tax on its income - although it must pay a 1%-2% excise tax on its net investment income. The U.S. has a long tradition of private foundations, which offer great flexibility regarding their structure and management. They do, however, involve a considerable effort and expense at startup, so they are usually only established when considerable assets are involved. (For related reading, see: Donor Advised Funds: The Benefits and Drawbacks.)
3. Find a Worthy Cause
To determine who you are going to give to, it is important to ensure that the cause will be one of the best recipients for your money. There are thousands of charitable organizations. Who you choose to give to will depend on what causes you are most passionate about. That will require some thought. But even when you know the area you want to work in, not all charitable organizations are equal.
Of course you want to avoid any scams, so you need to do some basic research about any organization you are considering donating money to. But even once you’ve screened out anything dubious, the fact is that while all charities have good intentions, they are not all equally effective. If assistance is done poorly it can hurt the very people it is supposed to help. Accurate information and sound practices are crucial. The American Institute of Philanthropy provides lots of great information and assistance in evaluating charitable organizations.
Budgeting for charitable giving during your financial planning process is an easy way to make a difference in the world. Giving to others in need can give a sense of purpose and has a positive impact on your own wellbeing. Understanding the way to give that enables you to have the most impact takes some research, but in the end, your donations will make a bigger difference. (For more, see: Don't Donate to Charity Scams: 5 Warning Signs.)