You Get What You Give: Investment Vehicles for Charitable Giving

As the second wave of Baby Boomers hits retirement age, many minds across the country are occupied with thoughts of carefully considered meaningful living. Some dream of golden years filled with family meals, grandchildren, and good books while others envision adventure: traveling to visit pristine white beaches and view rugged landscapes. One thing many soon-to-be-retirees have in common though, regardless of whether they’d rather relax in a hammock or climb a mountain, is a desire to make an impact during their retirement. For some this may mean providing support to family and for others it may mean a strong focus on charitable giving.

The truth is, giving feels good. If you’ve given a present, hosted a lovely meal, or donated to a charity, it comes as no surprise to you that we find meaning and fulfillment from giving. Whether you are the steward of a family legacy that has been carried on from generation to generation or you are just starting to build your legacy from the bottom up, there are specific solutions that allow you to put your investments in charitable giving vehicles. While donor advised funds, charitable remainder trusts, and foundations are not the only way to give meaningfully, they offer many incentives to the donor and are some of the fastest growing solutions in the United States.

1. Donor Advised Funds

What’s That? The sole purpose of donor advised funds is to support charitable organizations. They are easy to set up, irrevocable (meaning once established, they cannot be changed), and they provide many tax advantages to the donor.

How Does it Work? A donor is able to make a tax-deductible donation of cash, investments, or other financial instruments. The donation is then able to grow over time tax-free. Once a donor contributes to a donor advised fund, they are no longer the owner of the assets, but they do retain advisory privileges over how the account is invested and distributed. The donor is able to support IRS-qualified public charities with grant recommendations from the donor-advised fund.

Why Use It? A donor advised fund can accept assets other than cash (stocks, private business interests, cryptocurrency, private company stock) even after they have appreciated in value. This can be used as a tax savings vehicle if you are eventually planning to donate the assets to charity , as the donation is tax-deductible, and the assets will continue to grow tax-free.

2. Charitable Remainder Trusts

What’s That?  A CRT is a trust that generates a potential income stream for the donor (or other beneficiaries) for a certain period of time, with the remainder of the donated assets going to a designated charity / multiple charities. Once a CRT is established, it is also irrevocable. There are two main types of charitable remainder trusts:

Charitable Remainder Annuity Trust (CRATs): the distribution of a CRAT is set at a  fixed dollar amount and distributed annually. Once an initial contribution is made to a CRAT, no additional contributions can be added over time.

Charitable Remainder Unitrusts (CRUTs): the distribution of a CRUT is set at a fixed percentage of the assets in the trust, which can change annually based off additional contributions (unlike a CRAT) and investment performance.

How Does it Work? After a donor forms a CRT, they are able to make a partially tax-deductible donation of cash, stocks, real estate, private business interests or private company stock. From there, they select a beneficiary or multiple (could be themselves or someone they select) that receives an income stream for a specified timespan. After the specified timespan or the death of the last income beneficiary, (maximum timespan = 20 years) the remaining assets are distributed to the designated charity or charities.

Why Use It? This type of charitable giving vehicle enables a donor to pursue their philanthropic goals while also providing income for future needs. A CRT can accept multiple different types of investments, offers tax incentives, and preserves the value of highly appreciated assets.

3.  Private Foundations

What’s That? A private foundation is a 501(c)(3) organization that is typically controlled and funded by an individual or family. A private foundation can either be an operating foundation (directly involved in operating a charitable project or enterprise such as a museum) or a non-operating foundation (primarily make grants to charities).

How Does it Work? Once a donor establishes a foundation, a board of directors or trustees oversees the foundation. They are primarily responsible for receiving charitable contributions, managing and investing assets, making grants to other charitable organizations, filing tax returns, administrative reporting requirements, etc. A foundation will likely require the assistance of a CPA or a lawyer.

Why Use It? A foundation affords the donor more control than other charitable giving vehicles and helps one build / expand upon their legacy. It offers the potential to eliminate capital gains tax for gifts of long-term appreciated securities, and is able to accept many types of assets (cash, publicly traded securities, life insurance and annuities, IRA assets, real estate, private equity). There is also the potential for an immediate tax deduction.
When it comes to something as important as leaving a philanthropic legacy, taking the time to carefully select the avenue for charitable giving that is right for you is a critical step in establishing what your legacy will look like. Learn more about how Treehouse Wealth Advisors can help you manage your impactful retirement and charitable giving today.