Aligning Charitable Giving, Estate, and Tax Planning
Charitable giving can help transform the work of not-for-profit organizations that rely on donations to serve individuals and communities in need. A financial advisor with expertise in tax strategy and estate planning can help your generosity stretch even further.
Powering up your philanthropy
When people believe strongly in a cause, they often wish they could do more to support its mission. What donors may not realize is that every gift has the power to create a ripple effect.
“I always say that small gifts are what will cure cancer,” says Renee Kurdzos, Executive Director of Planned Giving at Fred Hutchinson Cancer Research Center—known as The Hutch—in Seattle. “They’re the ones that enable us to do pilot programs and to get those crazy ideas out there, such as our pioneering work in bone marrow transplantation.”
Likewise, relatively small adjustments in your approach to supporting nonprofits like The Hutch can dramatically increase the value of each donation and create other significant benefits for you. The possibilities start coming into focus when you connect charitable giving, estate planning, and tax planning within a holistic wealth management strategy.
“I love having those client conversations—where we dive really deep into what types of assets they may choose to donate, what their tax situation looks like, and what kind of legacy they want to create,” says Josh DeForest, Managing Director at Mercer Advisors. “Those answers actually shed a lot of light on how to do charitable giving more effectively in the context of someone’s financial plan.”
Kurdzos and Colby Bircher, Vice President and Charitable Planning Consultant at Fidelity Charitable, recently joined Josh DeForest of Mercer Advisors to discuss strategic options for supporting nonprofit causes. Their advice? Plan ahead, be creative—and don’t hesitate to reach out for guidance.
“Philanthropy comes in all different shapes and sizes,” Bircher says. “But you don’t have to be an expert on this topic. You can really lean on people like Josh and me to help explain the different options.”
Planned giving vehicles
In 2019, Americans gave more than $450 billion to charity, of which about 71% came from individual donors.1 Among those accustomed to writing a check, charging a credit card, or handing over cash, many are unaware of other strategies for donating to charity that have even greater potential impact.
For example, a variety of planned giving vehicles give people flexibility to spread their charitable contributions across different charities and over the course of many years while earning an immediate tax deduction in most cases.
These options include:
- Donor advised funds. “Donor advised funds are a great option for all types of givers,” Bircher says. Setting up this type of vehicle allows someone to contribute cash, publicly traded and appreciated stocks, and even some non-publicly traded assets. The fund owner receives an upfront tax deduction, which can be reinvested for future tax-free growth and disbursed to charity over time. “You retain advisory privileges over the account and how to give those dollars out,” she says.
- Charitable lead trusts. A charitable lead trust is an irrevocable trust designed to provide financial support to one or more charities for a period of time, with the remaining assets eventually going to family members or other beneficiaries. Charitable lead trusts operate for a set term—such as one or more person’s lifetime—and payments go to one or more designated charitable beneficiaries. After the term ends, any remaining assets can be distributed to non-charitable beneficiaries—such as family members.
- Charitable remainder trusts. A charitable remainder trust provides a stream of income to designated family members for a specified term, after which the remaining assets are transferred to one or more charitable organizations. This vehicle allows someone to make contributions to the trust and be eligible for a partial tax deduction, based on the amount of assets that will pass to charitable beneficiaries.
Each vehicle has different advantages, as well as limitations, that are best discussed with a financial advisor in the context of a person’s overall financial plan before choosing which option to pursue. An advisor can also help identify related opportunities to increase charitable impact. For example, if an employer offers a matching gift program, it might be able to contribute directly to a charitable trust or donor-advised fund.
Benefits of donating non-cash assets
Another beneficial option, either apart from or in tandem with a planned giving vehicle, is to transfer non-cash assets to charitable organizations. Examples include:
- Equity compensation. If your portfolio includes stock options, restricted stock units, or other equity compensation from an employer, gifting those assets is often more tax-advantageous than donating cash. However, this type of asset needs to be vested—meaning you fully own the asset—prior to donation.
- Privately owned business assets. If you own a business, gifting part or all of your interest in it to charity could yield hefty tax benefits. For example, you can avoid paying capital gains tax that otherwise would be incurred if you sold that portion of your business and donated the proceeds.
- Physical assets. You can work with a charity and your advisor on planned donations of commercial or residential property, undeveloped land, vehicles, and other valuable possessions. Again, gifting such assets directly instead of first turning them into cash will often help reduce your tax burden.
10 things to look for in a charitable organization
Donors naturally want to be sure they’re supporting organizations that are reputable, ethical, and responsibly managed. Kurdzos recommends some top criteria for sizing up a nonprofit:
- Does this organization have a good reputation?
- How does the organization measure its success?
- Has that measure of success changed over time?
- Is the organization’s financial information transparent—and recent?
- Can you access third-party audit information from this charity?
- Does the charity have many funders or only a handful?
- What is the main source of its funding?
- Has the organization experienced significant turnover among key staff members?
- How many people serve on the Board of Directors—and are they business or community leaders?
- Are its key leaders available for you to speak with?
What do charities need most from you?
Kurdzos encourages those who are interested in maximizing their impact through philanthropy to contact their favorite charities for specific guidance.
“The main thing I typically ask folks to consider is giving unrestricted support” as opposed to directing their contributions toward a specific program, branch, or beneficiary, she says. “It’s so easy to get caught up in and love a project, and that might be what brings you to a charity to begin with. But it’s often those unrestricted dollars that allow us to be nimble, especially in times of crisis.”
Beyond making a financial gift, Kurdzos says, donors can multiply their impact by acting as ambassadors for a charity among their family, friends, and co-workers.
“Post about us on social media, invite people to our events, and let them know why you care about our organization,” she says. “And, of course, we can always use people’s time and expertise.”
Putting the pieces together
Although the options available to people interested in charitable giving are practically limitless, they don’t have to be overwhelming. DeForest recommends three foundational steps toward optimizing the ways that you donate:
- Create a financial plan. As you move through this process of discovery with an advisor, discuss where philanthropy fits alongside your other values as well as your overall short- and long-term wealth management goals. That perspective will help clarify and prioritize how you want to support the causes you care about most.
- Develop and refine your tax strategy. This should be an integral part of any comprehensive financial plan. By working with a qualified financial advisor or tax specialist to understand how different charitable giving actions could influence your tax situation, you can often achieve savings that allow you to donate even more.
- Keep your estate plan up to date. Considering how you want to carry on your charitable impact beyond your lifetime can reveal vast new opportunities to benefit your valued causes as well as your beloved family members. Be sure to revisit the plan regularly and adjust for tax law changes along with your evolving goals.
“The key with all of these things is making sure that you’re looking at them holistically,” DeForest says. “When you have that comprehensive picture, the recommendations become a lot clearer because you know what all of the moving pieces are.
“Then you can have a bigger impact in your charitable giving,” he says.
Want to learn more? Replay the full webinar on charitable giving and tax planning strategies.
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1 “Giving USA 2020: What Are the Implications for You?” Nonprofit Quarterly, June 23, 2020.
The information provided in this presentation is intended to educate and is for information purposes only.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an Investment Adviser with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
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All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors.
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