How to Build a Charitable Legacy Without a Private Foundation
You don't need a private foundation to make a lasting impact. Private foundations can offer a lot of control, but they come with legal setup costs, required annual payouts, an excise tax on investment income, lower deduction limits, and public tax filings.
They can make sense for very large gifts or families who want staff and full control. However, for most families, simpler tools can deliver the same tax benefits, the same family involvement, and the same sense of purpose, with far less cost and paperwork.
Here are five effective, but simpler charitable gifting strategies to consider.
Donor-advised funds (DAFs)
A donor-advised fund offers many of the benefits of a private foundation, without the cost or the paperwork. You contribute cash or investments, receive a tax deduction in that year, and then recommend grants to charities over time. Here are other attributes you should recognize:
Simple to open: Many sponsors have low minimums and handle all the paperwork.
Flexible timing: You can "bunch" several years of giving into one year to get over the itemizing threshold, then spread the grants out.
Family involvement: You can name children or grandchildren as successor advisors, so the giving continues.
Good to know: DAF grants can't be used for any purpose that results in a personal benefit to the donor, or fulfills a personal financial obligation. In addition, the gift to the fund is irrevocable.
Qualified charitable distributions (QCDs)
If you're 70½ or older, you can give directly from your IRA to a charity. The gift isn't counted as taxable income, and it can count toward your required minimum distribution (RMD) if applicable. Here are several things you should understand:
Lowers taxable income, which can also help keep Medicare premiums (IRMAA) in check.
Works even if you take the standard deduction, which most retirees now do.
Annual limit: there is an annual limit to the amount that can be gifted through a QCD.
Good to know: QCDs must go directly from the IRA to the charity, and they can't be sent to a donor-advised fund.
Giving appreciated investments directly
Instead of writing a check, consider donating stock, mutual fund, or ETF shares that have grown in value and that you've owned for more than a year.
No capital gains tax on the growth, for you or the charity.
A deduction for the full market value if you itemize and the gift amount does not exceed the annual AGI deduction cap.
A chance to rebalance a portfolio without triggering a tax bill.
Good to know: Gifting investment shares works with public charities and DAFs. We would not suggest giving shares that have declined in value as this is less tax-efficient than selling them first.
Charitable remainder trusts (CRTs)
A charitable remainder trust can provide you (or you and your spouse) with an income stream for life or a set number of years. Whatever remains at the end goes to the charities you choose.
Helpful for highly appreciated assets, such as a concentrated stock position or real estate, since the trust can sell without an immediate capital gains bill.
A partial tax deduction up front, based on the expected gift to charity.
Income for you, a legacy for others
Good to know: CRTs are irrevocable and require an attorney to set up, so they are generally most appropriate for larger gifts.
Naming charities in your estate plan
Some of the most tax-efficient gifts happen at death. A few common approaches:
Name a charity as beneficiary of a traditional IRA. Your heirs would owe income tax on inherited IRA money; a charity owes none. Leaving after-tax or stepped-up assets to family and pre-tax IRA dollars to charity can be a tax-efficient distribution strategy to consider.
Include a charitable bequest in your will or revocable trust, as a set dollar amount or a percentage.
Use a DAF as the beneficiary, so your children can keep recommending grants in your family's name.
This is one of the simplest legacy strategies available, and it often costs nothing more than updating a beneficiary form.
Your legacy, your way
A meaningful charitable legacy is about giving with intention, using the right assets at the right time, and bringing your family along throughout the process to instill a giver’s mindset. With the right plan, you can do more for the causes you love and keep more of your wealth working for the people you care about.
Click here to learn more about charitable gifting strategies that you may want to consider.
Chip Hymiller, AIF®, CFP®
Founder and Principal
Find out more about Chip on his profile page here! Be sure to listen to his episode on Finance in a Flash to hear how he started in the Financial Planning Industry!