SMARTER YEAR END GIVING

Donor advised funds, private foundations and other strategies can help you maximize your philanthropic giving

By David Ratcliffe of Merrill Lynch

Last year alone, Americans gave in excess of $260 billion to charity, but if you’re like most, you probably made a donation in a year end flurry of check writing. If that’s the case, then you’re not reaping all the financial benefits of your charitable gifts.

Too often, donors fail to realize that the specific assets they give—and when they give them—are vitally important to their long term financial strategy.

Decide What to Give

As a donor, you should first take careful inventory of your holdings, which may include real estate, personal property such as artwork, and stocks or bonds.

If sold, these assets will result in different realized capital gain depending upon how long the assets have been held and the capital gains rate applicable to those assets. If donated to charity, they can generate disparate charitable income tax deductions depending upon the type of asset, the charity to which they are donated, and whether or not the charity can put the assets to related use. That’s why it’s important to consult your Financial Advisor and a tax attorney to determine the best asset to donate to meet your financial situation.

The government encourages charitable giving through income, gift and estate tax deductions as well as other tax code provisions, such as the ability to create charitable remainder trusts, gift annuities, pooled income funds, private foundations and donor advised funds. These strategies enable individuals to maintain flexibility and legally permit control over their assets while participating in charitable giving. Choosing the right strategy depends on your philanthropic goals and your overall financial objectives.

Support Your Cause Through Donor Advised Funds

Donor advised funds—essentially a charitable gift to a grant making charity (such as a community foundation)—are increasingly popular because they provide an immediate tax deduction, and also allow a donor to recommend how much, to what charity and when those assets should be distributed. The donor can also name other fund advisors (such as a spouse, children, grandchildren or friends), which is particularly beneficial if you wish to establish a lasting legacy of giving.

Donor advised funds can also provide strategic, continuing tax benefits each time you make an additional contribution to your donor advised fund because you can vary the size of your donations from year to year to maximize the benefits in the years you need it. Then, when you’re ready, you can decide how much, which charity and when you will recommend the grants from the donor advised fund to be distributed.

Merrill Lynch enables donors to create and contribute to a flexible donor advised fund through the Merrill Lynch Community Charitable FundSM (MLCCF). Gifts can be targeted to local and national charities alike giving donors the added benefit of portability.

For example, if you create a fund with a participating community foundation in one jurisdiction you are not limited solely to making grants in that location. You can recommend grant distributions to any qualified nonprofits in the country. That’s a big plus, particularly for younger, more mobile donors, because their philanthropy can follow them wherever they go.

Know All Your Giving Options

If you prefer even greater control over your donations then a private foundation may be a better option. However, a foundation requires expert tax and legal advice to set up and operate, and it is subject to far greater government regulatory scrutiny than a donor advised fund.

Other strategies can also provide significant benefits. For example, a charitable remainder trust can allow you to receive income and estate tax deductions for your donations and still receive distributions from the trust for a set period of time—often over your entire life. Although you will pay income tax on the distributions received from the trust, the trust’s assets grow tax free.

The distributions you receive may even be tax favored distributions in the form of capital gain or return of principal, depending upon the way the trust is managed. When the set time expires, the remainder goes to your designated charity or charities.

If you’re over 701/2 years of age, you can also donate directly from an individual retirement account (IRA). The recently enacted Pension Protection Act of 2006 allows individuals who have reached the age of 701/2 to transfer up to $100,000 per year in 2006 and 2007 from their IRAs directly to qualified charities of their choosing. The transfer will qualify as all or part of their required minimum distribution, but is not reported as taxable income to them. Since it is a tax free transaction, the donor is not allowed to take a charitable deduction. However, this could be a good strategy for those who wish to draw down their IRA without inflating their taxable income.

Done properly, philanthropy can benefit both the charitable organization and the donor. The key to making that happen is simple: plan ahead. A Financial Advisor can work with you and your tax advisor on a strategy that helps you reach your philanthropic goals while meeting your personal financial goals.

David Ratcliffe is Director of Merrill Lynch’s Center for Philanthropy and Nonprofit Management.

Merrill Lynch and its representatives do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein.

© 2015 TLC Magazine Online, Inc.