By Heather Castle, CFP
Learn more about Heather at NerdWallet’s Ask an Advisor
Many people think the hardest part of making a charitable gift is deciding which worthy charity to contribute to. While this may be true, people also often don’t think about or don’t fully investigate the different ways they could donate.
Here are five methods of giving and what you should know about them before you make your next donation.
This is the typical method for most individuals and families who donate to charities. It’s simple and straightforward: You write a check to the charity, and the charity accepts your check and puts your donation to work for its good cause.
Before you donate cash, ask the charity to give you a copy of its 501(c)(3) determination letter. This letter shows that the charity is a tax-exempt organization in good standing with the IRS. That means you’ll be able to deduct your gift on your federal income tax return — typically up to 50% of your adjusted gross income for public charities and 30% to 50% for private foundations.
2. Appreciated assets
Donating an appreciated piece of property or asset is fairly similar to giving cash. Many people give appreciated stock to charities; it’s easy for a charity to sell the stock and use the proceeds as it would a cash donation.
If you’re thinking about donating a piece of art or some other asset that might be hard to sell, talk with the charity first. If it won’t be able to sell the item and use the cash, it may not want to accept the gift.
You can deduct donations of appreciated assets — sometimes called gifts of capital gains — only up to 30% of your AGI.
3. Donor-advised fund
Requesting and collecting all the 501(c)(3) determination letters and saving all the records of your donations for tax purposes can be a hassle. If a gift was small and you didn’t keep a record of it, you might overlook it and miss out on a deduction. To reduce record-keeping headaches, some people turn to donor-advised funds.
A DAF allows you to make gifts to a public charity, get an immediate tax benefit and then make grants to that charity or others over time. The charity that administers the fund will make sure the charities you make grants to are tax-exempt and in good standing with the IRS and will send checks on your behalf. It also will keep a record of the grants you’ve made.
Many brokerage companies have set up their own public charities to administer DAFs. You can donate a lump sum or make contributions throughout the year. The DAF itself qualifies as a tax-exempt organization.
After you’ve funded your account, you can:
- Grant your entire contribution to a charity or charities of your choosing. Your donation doesn’t have to stay at the charity that administers the fund.
- Invest your contribution and allow it to grow for future grants to charities.
- Decide on a combination of the two, granting part to charity now and leaving the rest to grow.
Just as your gifts to charities are irrevocable, so is your gift to the DAF. You can’t take the money out of the fund and use it for other purposes.
Also, many people like the option of giving anonymously. If you want to give to a charity but don’t want to be recognized for the gift or you want to avoid being put on a mailing list, the anonymity that a DAF can provide is ideal.
4. Charitable gift annuities
Charitable gift annuities are a bit more complex and require more planning. However, they’re a great way to grow your donation to a charity. With a CGA, the charity serves as the management company, and any profits the investment earns go to that charity.
The donor gets an income tax deduction on the gift, as well as a portion of the donation back through annuity payments. However, creating a CGA will tie up a large portion of your money, and it can be costly to terminate the annuity outside its set term. Be sure you won’t need access to any of the money you put into this type of investment.
Also, the CGA will terminate if the charity you choose becomes insolvent and files for bankruptcy. Research the charity carefully to make sure it’s financially stable.
5. Charitable remainder trust
Another way to grow your charitable donation through investment is a charitable remainder trust. CRTs allow a donor to give assets through an initial donation to the trust. The trust then makes annual distributions to a beneficiary, often the donor/grantor.
At the end of the term, what remains in the trust goes to the chosen charity. CRTs offer more security than charitable gift annuities because they make the donation only at the end of the term.
CRTs have several tax benefits due to the income tax deduction as well as the fact that the trust itself will not be taxed for income. However, the beneficiary who receives the annual distributions will pay tax on that income.
Additionally, CRTs are attractive when creating more involved estate plans as a method to avoid estate taxes. CRTs offer a full estate tax deduction if created at the grantor’s death.
A CRT can be costly to create and maintain due to potential management and legal fees, and will require you to make a large contribution.
Regardless of the size and complexity of your planned gift, it’s a good idea to consult with your tax advisor or a certified public accountant about the best method for your situation and wishes. Also, if you want to create a charitable gift annuity or charitable remainder trust, speak with your estate attorney.