Philanthropy can be contagious and can inspire others to take action. It can also establish a family legacy that will be supported through the generations. But before giving, consider your strategy, and more importantly, your values and interests.
“It’s important to have a connection to or be passionate about the charity to which you give,” says John P. McHugh, Senior Wealth Manager at Budros, Ruhlin & Roe, Inc.
Often people don’t dedicate the time to think about their philanthropic goals until they come to an adviser, he says, and this unknown can lead to decision paralysis with regards to major charitable gifting. With a little guidance, that can be overcome.
Smart Business spoke with McHugh about charitable giving strategies and how to execute them.
What typically stops someone from charitable giving?
For many, if they don’t know the outcome of their actions they may end up doing nothing. Donors want to know their money is being used wisely, and understanding all the pieces of charitable giving is liberating.
The primary question of whether potential donors believe they have enough to give and still maintain their lifestyle is paramount. Secondly, the question of how much to leave to heirs, or how much their heirs need, is a key concern.
What are the main options for donors to execute a charitable giving strategy?
Among the tools that donors can use for giving are charitable remainder trusts, charitable lead trusts, donor advised funds, private foundations, bequests at death and outright gifts during lifetime.
In a charitable remainder trust, a donor makes a gift via trust and the donor or a beneficiary receives an income from the trust for his or her lifetime. When the income beneficiary passes, the remaining trust funds go to the charity of the donor’s choosing. This is a good vehicle to use if the income is needed during a donor’s or beneficiary’s lifetime.
A charitable lead trust is similar to a charitable remainder trust except that the charity gets the use of the stream of income generated during the term of the trust. At the end of the trust term, the remaining assets go to the donor or donor’s heirs. This is a good choice if the donor doesn’t need the income during his or her lifetime but wants the assets to remain within his or her family after death.
A person who has a significant income tax event during a year — say, the sale of a business — might consider a donor advised fund. These vehicles are managed by community foundations and provide donors with an immediate tax deduction, and time to decide how and when to allocate the typically large sum of money among the person’s favorite charities. The donor advises where the foundation should send the money, which can be done in any increment the donor chooses. This mechanism also grants donors privacy, since any grants made this way are not public record.
A private foundation is typically created by a family for the purpose of charitable giving in which the family is fully in control of how the funds are granted to charity. It can be expensive and time-consuming to run because its complexity requires someone knowledgeable to administer it, handle the taxes, execution, etc. When a donor makes a grant through his or her foundation, it’s documented in its annual tax return and is public record.
Bequests are written into a person’s will and specify that a certain gift will transfer to a charity upon the donor’s death. Bequests are typically given for a certain purpose, such as to honor a person’s memory.
An outright gift is just that — a person feels a charitable connection and he or she makes a donation. This gives the donor the satisfaction of seeing how the donation helps the charity during his or her lifetime.
Who should be involved in a charitable giving strategy on the donor side?
A person’s immediate family can be an important part of the philanthropic decision-making team. Otherwise, a team of trusted advisers — an accountant, financial adviser, attorney, an insurance agent if life insurance is involved — working in collaboration can help a donor deal with the complex tax and legal implications of giving. The team also ensures the gift is thoroughly vetted and gives the donor the confidence that it’s the right thing to do.
Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.