Too many people try to give their charitable giving a go alone, making common mistakes that cause them to miss out on receiving maximum returns.
“It’s critical to incorporate charitable giving into your overall financial plan and make sure you choose the right type of giving,” says Denise Glinatsis Bayer, Vice President, Senior Trust Officer, Premier Bank.
Smart Business spoke with Bayer about the mistakes that can decrease the impact of philanthropic giving and how to gain its full potential financial benefits to both the giver and the recipient.
What are common mistakes with charitable giving?
Some common mistakes include not considering your overall plan, missing out on tax-advantaged planning techniques and not timing charitable gifts in the most tax-advantaged way. Taking advantage of these strategies can not only alleviate your tax burden but help the causes you support over a longer term due to your investment strategy.
Many people don’t time their charitable gifts in the most tax-efficient way. One simple tax-efficient way is to fund one large gift, as opposed to making smaller annual gifts, to maximize itemized deductions.
Consider donating stock or highly appreciated assets. If you sold a specific stock position, you personally would realize any capital gains that might result. Instead, you could transfer that stock in kind to a qualified tax-exempt organization. This type of transfer often results in a larger gift to the charity because it is tax-deductible to the donor and the charity does not have to pay those capital gains taxes.
If you are taking required minimum distributions from your retirement account, consider a qualified charitable distribution to reduce your taxable income. This is a donation made directly from your retirement account to your charity of choice. You won’t receive a tax deduction for a qualified charitable distribution, but the amount you transfer to charity won’t be included in your income for the year, which can help keep your tax bracket lower.
There are a number of charitable giving tools that can be a part of your overall financial plan. One of the easiest and most tax-advantageous ways to give to charity is to establish a Donor Advised Fund, or DAF. A DAF is a charitable investment account for the sole purpose of supporting charitable organizations you care about.
Charitable trusts are irrevocable trusts that can distribute an income stream to a designated charity or nonprofit, while also minimizing taxes to a noncharitable beneficiary. A charitable lead trust makes payments to a charity for a set period of time, then to the donor or other noncharitable beneficiary, like a family member.
A charitable remainder trust provides the donor or other noncharitable beneficiary with a stream of income for a set period of time, with the remaining assets in the trust reverting to the charity.
How can you maximize impact?
Start with a charitable mission. What causes and organizations are important to you? Once you have an idea what you want to support, you can implement that giving by incorporating those organizations and causes into your estate planning.
The next step would be creating a plan to give in a thoughtful way during your lifetime. How can you use the timing of your gifts to maximize your tax planning? What are the best assets to give? What planning vehicles can you put in place to reach those giving goals?
How important is finding the right wealth manager?
Because these plans can involve your overall estate plan, consult with an estate planning attorney and talk with your CPA or tax adviser. It is important to work with a wealth adviser that has a background in estate and tax planning. Many times, people are thinking about planning for retirement or family giving, and charitable giving is not taken into account.
With proper planning, your charitable intent can make a much larger impact.
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