For high-net-worth individuals, balancing the desire to make a meaningful impact through philanthropy with the need to reduce taxes and ensure wealth is passed on to future generations can be a challenging task. Fortunately, there are effective charitable giving strategies that allow you to achieve all of these goals simultaneously, ensuring you support the causes you care about while maximizing tax advantages and preserving your legacy.

Key Charitable Giving Vehicles

Several well-established charitable giving vehicles can help individuals achieve their philanthropic and financial goals. These include private foundations, donor-advised funds, charitable remainder trusts, and charitable lead trusts. Each of these structures offers unique advantages, allowing donors to make irrevocable contributions to charity while benefiting from tax breaks. Let’s explore some of the most common options.

Private Foundations

Private foundations are often favored by those with significant assets to donate. These foundations can be funded with a variety of assets, including cash, stocks, or real estate. A key requirement is that they must distribute at least 5% of their assets each year for charitable purposes.

The primary advantage of a private foundation is its flexibility and control. Donors maintain direct control over how grants are made and investments are managed. Foundations can also operate in perpetuity, with family members holding board positions and making key decisions about grant distributions. This structure is ideal for families looking to create a long-lasting charitable legacy.

Donor-Advised Funds (DAFs)

Donor-advised funds are similar to investment accounts, but specifically for charitable giving. Donors contribute assets to a DAF, which can grow tax-free, and then distribute those funds to public charities over time. Contributions to a DAF provide immediate tax deductions, often offering greater benefits than those available through a private foundation.

DAFs are less administratively complex than private foundations and don’t require annual distributions, making them a convenient option for those seeking simplicity. Additionally, DAFs offer the flexibility for donors to remain anonymous if they wish, though funds can only be directed to eligible charities.

Charitable Remainder Trusts (CRTs)

Charitable remainder trusts provide a unique opportunity for donors to support charity while still receiving income. With a CRT, the grantor or their beneficiaries receive an income stream during their lifetime or for a set number of years. After the trust term ends, the remaining assets are given to the designated charities.

An attractive feature of CRTs is the ability to name donor-advised funds or private foundations as the charitable beneficiaries, offering flexibility in how the donations are distributed. CRTs are an excellent choice for individuals who wish to generate income while making a lasting charitable contribution.

Charitable Lead Trusts (CLTs)

Like charitable remainder trusts, charitable lead trusts are irrevocable, but they differ in how the funds are distributed. With a CLT, income generated from the trust is donated to charitable organizations over a specified period. Once the trust period concludes, the remaining assets are passed on to the donor’s heirs, free of estate and gift taxes.

CLTs are another valuable tool for tax mitigation, allowing donors to reduce the taxable value of their estates while benefiting charitable causes. These trusts help donors fulfill their philanthropic goals while minimizing taxes for their beneficiaries.

Getting Started

Charitable giving can be a rewarding way to preserve wealth, support causes that matter to you, and create a legacy of generosity. When family members are involved in decision-making, it can also provide an opportunity to instill shared values, teach financial responsibility, and foster a sense of purpose across generations.

To explore the best charitable giving strategy for your personal and family goals, consider consulting with a wealth advisor. Your advisor can work with estate planning professionals to design a customized plan that fulfills your philanthropic vision and financial objectives.