Choosing the Right Charitable Vehicle for Your Goals and Needs
In our experience, the older we get, the more we realize how much there is to be thankful for. This realization often prompts a desire to give back – to share our personal blessings with the world around us.
For many, especially those nearing or in retirement (though not exclusively), charitable giving becomes a deeply meaningful goal. It’s a way to enrich one’s life by positively impacting others.
But while the spirit of giving comes from the heart, the strategy should come from the head. Just as different motor vehicles serve different transportation needs – a sports car for speed, a truck for towing, a mini-van for families — different charitable vehicles are suited to different philanthropic goals and financial circumstances. Some are also more tax-advantageous than others.
Whether you’re just beginning to explore charitable giving or are an experienced philanthropist, it’s important to evaluate the options available – and periodically reassess whether your current vehicle is still the best fit.
With that in mind, here are four of the most common charitable giving vehicles, along with a quick overview of their pros and cons.
Vehicle #1: Donor Advised Funds (DAFs)
A donor-advised fund is an investment account designed to support charitable giving. You can contribute cash, equities, and even alternative assets. All contributions are tax-deductible – up to 60% of your adjusted gross income for cash donations.1
The primary advantage of a DAF is flexibility. You can contribute now and decide later which organizations will receive the funds, all while benefiting from the immediate tax advantages. Multiple individuals can contribute to a DAF, making it a good option for families seeking to pool resources.
However, DAFs offer only advisory privileges – not control. While you can suggest how the funds are used, the charity makes the final decision. Additionally, donations are irrevocable and cannot be reclaimed.
Vehicle #2: Private Foundation
A private foundation is a legal entity created to fund charitable activities. Unlike public charities, which may raise funds from the public, a private foundation is typically funded by a single individual, family, or corporation.
Private foundations provide full control over the investment decisions, grantmaking, and governance. They also offer the opportunity to create a legacy, as foundations can exist in perpetuity.
The trade-off? Complexity. Setting up a private foundation requires IRS approval, annual filings, and the creation of a board of directors. It is not a passive endeavor, but an ongoing commitment that requires time and administrative effort.
Vehicle #3: Charitable Remainder Trust (CRTs)
A CRT allows you to donate assets to a trust while receiving an income stream for a set period (or for life). After this period ends, the remaining assets are transferred to a designated charity – which could include a private foundation.
This structure supports both your current cash flow and long-term charitable goals. However, CRTs must be established with the help of an attorney and are irrevocable. They may not provide the same immediate tax benefits as other vehicles.
Vehicle #4: Charitable Lead Trust (CLTs)
A CLT is essentially the reverse of a CRT. In this case, your chosen charity received regular payments for a fixed term, after which the remaining assets pass to your heirs, potentially free of estate or gift taxes. CLTs can be useful tools for integrating philanthropy into your estate plan.
However, CLTs are complex. There are two main types, each with specific tax implications and structuring requirements. They must be carefully designed with legal and financial professionals. Like CRTs, CLTs are irrevocable.
If you would like to explore any of these options further, please don’t hesitate to reach out. We would be happy to discuss how charitable giving can support both your values and your financial goals.
1 “Publication 526, Charitable Contributions,” Internal Revenue Service, https://www.irs.gov/publications/p526
