Choosing the right vehicle for your charitable giving goals

One of the first steps to developing a strategic approach to giving is to determine which charitable giving vehicle is right for you.

  • By Fidelity Learning Center
  • Charitable Giving
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When it comes to supporting charitable causes, many people practice what is sometimes referred to as "checkbook philanthropy." This means they simply donate cash by writing a check in response to a specific appeal they have received.

If this describes how you manage your charitable giving, you may want to consider taking a more strategic approach. Doing so may enable you to maximize your tax benefits and create a bigger impact with your donations. One of the first steps in developing a strategic approach to giving is to determine which charitable giving vehicle is right for you. Below is a brief review of some of the most common vehicles for charitable giving.

Donor-advised fund

A donor-advised fund, or DAF, is a charitable giving vehicle sponsored by a public charity. With a DAF, you make an irrevocable contribution to the public charity that sponsors the DAF and your donation is eligible for an immediate tax deduction. Typically, you can donate cash, stocks, or non-publicly traded assets such as real estate, private business interests, and private company stock.

Assuming you itemize deductions on your federal tax return, when you donate cash, you can generally deduct up to 60% of your adjusted gross income (AGI). If you donate other types of assets, these donations are generally deductible at fair market value, up to 30% of your AGI, provided you have held them for more than a year.

Once your DAF has been funded, you can then recommend grants over time to any IRS-qualified public charity. The initial minimum required contribution necessary to establish a DAF is typically a few thousand dollars, which is low compared to other giving vehicles.

To provide a source of funding for the long-term support of the charities you care about, you can recommend how your donations are invested within the DAF and make grant recommendations later. This will allow for potential tax-free growth and potentially enable you to provide more funding to the charities that you care about.

Donating with a DAF helps streamline your recordkeeping and consolidates your tax receipts in one centralized, online location. Generally, DAFs allow you to remain anonymous when you recommend grants to charities. You can establish a DAF in your family's name and appoint successors to continue your family's legacy of philanthropic giving.

If you establish a DAF, be aware that while you choose where to make grant recommendations, the sponsoring charity has ultimate control over the grants. Grants cannot be used to support non-charitable entities or be used to satisfy binding pledges.

Private foundations

A private foundation is a charitable organization typically established by an individual or family with a substantial initial gift. A board of directors or trustees oversees the private foundation and is responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations.

With a private foundation, you can establish a legacy beyond your lifetime and allow family members to be employed or serve as members of the governing board. Over time, the board's investment management decisions may help grow the amount of assets available to support the foundation's charitable mission. Because you maintain full control over grant-making decisions, you can support charitable programs undertaken by individuals, scholarship programs, and other entities, as well as 501(c)(3) charities.

When compared to a DAF, private foundations are administratively more complex. They require legal setup and ongoing maintenance, including annual filings and other reporting. For these reasons, a private foundation may be more appropriate for someone who is interested in becoming immersed in the execution of their giving strategies, including managing the organization, hiring a staff and investment managers, actively managing grantmaking, and sponsoring charitable events.

While private foundations are exempt from federal income tax, their investment income is subject to a 1% to 2% excise tax. In addition, at least 5% of the foundation’s assets must be distributed each year.

From a personal tax standpoint, charitable deductions are limited to 30% of AGI for cash and 20% of AGI for long-term publicly traded securities. This compares to limits of 60% and 30%, respectively, with some other charitable vehicle options. Non-publicly traded contributions, such as privately held stock or real estate, may only be deductible at your cost basis rather than fair market value (FMV).

Charitable remainder trusts

A charitable remainder trust (CRT) is an irrevocable trust that allows you to "split" a trust's assets between charitable and non-charitable beneficiaries, thereby helping with retirement, estate planning and tax management goals.

A CRT generates a potential income stream for you or other beneficiaries during your lifetime. After you and/or your beneficiaries pass, the remainder of the donated assets passes to one or more charities that you named in the trust.

There are 2 types of charitable remainder trusts (CRTs): charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). A CRAT distributes a fixed annuity amount each year, and additional contributions are not allowed. A CRUT distributes a fixed percentage based on the balance of the trust assets (revalued annually), and additional contributions can be made.

Both trust types are treated as an irrevocable transfer of cash or property and are required to distribute a portion of income or principal to the beneficiaries. Investment income is exempt from tax.

At the end of the specified term or the death of the last income beneficiary, the remaining trust assets are distributed to a charitable remainder beneficiary. The annual annuity must be at least 5% but no more than 50% of the trust's assets. A trust's term may be fixed but can be no longer than 20 years, or it can be for the life of one or more non-charitable beneficiaries.

These charitable giving vehicles preserve the value of highly appreciated assets by allowing you to contribute an asset to the CRT, eliminate capital gains taxes by making a tax-exempt sale within the trust, and thereby donating the full value of the property to the CRT. You can then take an immediate charitable deduction against your income or gift tax for the present value of the trust's assets that will pass to the qualified charity (the remainder beneficiary).

CRTs may be a good option if you want an immediate charitable deduction but also have a need for an income stream to yourself or another beneficiary. If you set up instructions to establish a CRT at your death, this may be a good way to provide income for your heirs, with the remainder going to charities of your choosing. Keep in mind that CRTs require legal setup and have ongoing maintenance costs.

Charitable lead trusts

A charitable lead trust (CLT) is the inverse of a CRT. It's an irrevocable trust that generates a potential income stream for the named charitable beneficiary, with the remaining assets eventually going to non-charitable beneficiaries. CLTs are not tax-exempt, and the tax treatment of the trust can vary, depending on how you set it up.

There are 2 types of CLTs:

  • Non-grantor lead trust: The trust's annual income is not taxable to the grantor (the person who funded the trust). In this case, you cannot take an income tax deduction for creating the trust. The trust pays tax on the income, and claims a charitable deduction for the amount it pays to the charitable beneficiary each year.
  • Grantor lead trust: With a grantor lead trust, the grantor can take an immediate charitable contribution deduction for the present value of the future income stream to the lead charitable beneficiary, subject to applicable percentage limitations. These amounts depend on whether a public charity or a private foundation is the beneficiary. However, this benefit is mitigated by the fact that the trust income is taxable to the grantor during the term. You cannot offset future charitable deductions, as these amounts are paid to the charity.

Both types of CLTs allow you to choose the term of the trust and the amount distributed, at least annually, to charity. Assets used to fund a charitable trust are removed from your estate and may not only reduce the amount of tax your estate has to pay upon your death, but may also preserve funds for your heirs.

CLTs may be a good fit if you want to pass appreciated property to heirs and reduce gift and estate taxes. However, this requires that you part with the income for a number of years in return for potential estate and gift tax savings. Keep in mind that a CLT is not tax-exempt. Trust income is taxed like the income of any other complex or grantor trust.

There are many ways to support your favorite charities, each with its own benefits and drawbacks. View a charitable giving matrix for a handy side-by-side comparison on the Fidelity Charitable® web site.

Next steps to consider

Take a few minutes to learn more about the Fidelity Charitable® Giving Account®.

Tips for making charitable giving part of your financial plan.

In-depth courses to help you manage your charitable giving.

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