Highlights from the Family Philanthropy Presentation
Event hosted by Hutchinson Community Foundation
Adams Brown team members recently attended the Seven Options in Family Philanthropy presentation by Kathryn W. Miree at the Hutchinson Community Foundation. During the presentation, Miree discussed ways to practice family philanthropy, as not all types apply to everyone.
Over $485 billion was donated to nonprofits in the United States in 2021, and only 10 percent of donors itemize it as a deduction. Summarized below are the most commonly used charitable giving vehicles and their tax implications.
7 Options in Family Philanthropy:
- Private Foundation – a 501(c)(3) receiving funds from only a few sources (as opposed to broad public support), and the board is controlled by the funder. It is challenging to manage this effectively because there are numerous rules, limits and excess taxes. For example, there are lower annual gift limitations. Individual charitable deduction limits are 30% of adjusted gross income for gifts of cash or 20% of adjusted gross income for gifts of property compared to 50%/30% limits for public charity gifts. Noncash donations are generally subject to the donor’s tax basis, except for publicly traded stock for which market value is deductible.
- Supporting Organizations – a separately-established public charity that makes distributions to other public charities. Supporting organizations are subject to the most advantageous charitable deduction rules.
- Donor Advised Funds – created by making a charitable gift to a publicly supported charity to create a segregated fund over which the donor reserves the right to make nonbinding recommendations on where the donations are allocated. Contributions are subject to higher public charity deduction rules. This includes a market value deduction for long-term appreciated property such as real estate and closely held businesses. Another advantage of a donor-advised fund is that donors can time the charitable deduction by making the gift in the year in which the deduction will prove most valuable and advising distributions in later years. Donor-advised funds can be especially beneficial when an individual expects to have a tax year with a considerable amount of income.
- Charitable Lead Trust – a irrevocable trust that creates an income, gift and estate tax charitable deduction for the present value of amounts irrevocably set aside for one or more charities over the term of the trust. A non-grantor charitable lead trust allows the donor to combine personal planning goals (maximizing the assets transferred to heirs) with philanthropic goals. They are not tax-exempt but are taxed as complex trusts. Complex trusts hit the 37% tax rate with income of $13,451 in 2022. However, the impact of the tax on ordinary income can be offset through the distribution of income to the charitable beneficiary(ies).
- “Charitable” Revocable Trust – simply a revocable trust but used for family philanthropy. The donor funds the revocable trust with dollars that will be used to make charitable gifts. Amounts given to charity during the operation of the trust are deductible to the granter as charitable income tax and gift tax deductions during life. There is no immediate charitable deduction for assets transferred to the trust.
- Partnership with Charity – an endowment that allows focus on specific goals without needing to create a separate entity. This arrangement is not much different from a private foundation that determines it will solicit grants to achieve a particular purpose, such as starting a new school or creating a new day care. The donor receives the charitable deduction benefits associated with public charities.
- Kitchen Table Philanthropy – a test run for running a private foundation in which one generation engages another to allocate a set dollar amount to charity. Simply a mechanism designed for teaching young children how to give and make an impact. The donor makes annual distributions and can time the distributions as appropriate for personal taxes.
Questions to Ask Yourself When Choosing a Charitable Giving Option:
- How much am I donating?
- When do I want to donate?
- What type of assets am I looking to donate?
- Do I want to give anonymously?
- How much control do I want to have over the distribution?
Often, donors find it beneficial to use a combination of methods to meet their optimal philanthropic, tax and financial goals. Whichever charitable vehicle is used, it is important to choose the right one to accomplish your philanthropic goals. Contact an Adams Brown professional to learn about charitable giving options and how choosing one over the other can affect your tax situation.