Financial Planning

Understanding Charitable Giving

Updated 11/11/2020

As an integrated financial advisor, H.M. Payson fields a lot of questions around the topic of charitable giving, and our advice varies widely depending upon the client, their assets, their life stage, and their goals.

Some methods of charitable giving require more planning than others, so it’s never too early in the year to start thinking about your philanthropic options. If you are considering any form of charitable giving, we would be happy to explore these options in greater detail with you.

In the meantime, this note will give you an overview of the basic vehicles for charitable giving throughout life and at death, including when each option might be suitable.

When to give?

Charitable giving can be done during lifetime or at death.  Before making a lifetime gift, you must be confident that you won’t need the assets you’re giving away. As long as that’s the case, your charitable gift will give you the benefit of income tax deductions, a reduced estate size (that will eventually be subject to estate tax), and the joy of seeing your gift at work in the world.  Giving at death also has some distinct benefits. It may provide your estate with a deduction against estate taxes. And while lifetime gifts to individuals are subject to the annual gift tax exclusion (capping non-taxable gifts at $15,000 for 2020), donors can make unlimited gifts to charity for estate tax purposes.  The methods of charitable giving listed below can be used either during your lifetime or at death.


One of the simplest ways to support your charity of choice is to mail them a check. Under the CARES Act enacted in March 2020, a donor can now elect to deduct up to 100% of the donor’s adjusted gross income (AGI) for cash gifts made to charities in 2020.  Cash gifts to donor advised funds provide the donor with an income tax deduction for the amount given, up to 60% of the donor’s AGI. Plus, cash gifts can be made last-minute. Checks mailed by U.S. Postal Service are deemed to be delivered when the donor places the envelope in the mail.

Ideal when: it’s year-end, and you need a larger income tax deduction.

Appreciated Stock

An appreciated stock donation offers more tax benefits than a cash donation. If a donor makes a gift of stock with unrealized long-term capital gains, he or she can claim an income tax deduction of the stock’s full fair market value, plus avoid the capital gains tax that would be due upon selling the stock. As a result, the donor pays less in tax, and the charity gets a larger donation.  However, the limitation on deductions for appreciated stock is 30% of AGI.

Ideal when: market valuations are high, and you want to maximize your gift.

Retirement Assets

Tax-deferred assets like retirement accounts provide significant income tax benefits during life. At death, however, they are subject to both estate tax in the donor’s estate and to income tax when heirs start taking distributions. However, donating tax-deferred assets to charity gives the donor’s estate a tax deduction. For that reason, we recommend that if you are going to leave assets to charity, you consider using the tax-deferred ones first, and leaving your heirs with other assets that will get a “step-up” in basis at your death.

Giving retirement assets during life can also provide a tax benefit.  If you have reached age 70 ½, you can transfer up to $100,000 per year directly from your IRA to charity (known as a “qualified charitable distribution”).  You will not receive an income tax deduction for the gift, but starting in 2021 the amount given to charity counts towards your annual RMD requirement (2020 RMDs were suspended by the CARES Act) and is not included in your taxable income.  Furthermore, this strategy is available even if you do not itemize deductions on your tax return.

Ideal when: you want to give after death, but not at your heirs’ expense, or you want to give during your life but do not otherwise itemize your deductions.

Charitable Remainder Trusts

A charitable remainder trust is a type of split interest trust. In this type of irrevocable trust, which is established by and funded with assets from the donor, the income interest is separate from the remainder interest.

Setup and administrative costs include legal fees for the preparation of the governing trust document, accounting fees for the annual trust income tax return, and trustee fees for the trust administration.

A charitable remainder trust pays an income stream to an individual, often the donor, either as a fixed dollar amount (an annuity payment) or a fixed percentage of the trust principal (a unitrust payment), for a set term of years or for the donor’s life.

At the end of that term, the remainder passes outright to charity. When the trust is funded, the donor receives a charitable income tax deduction for the value of the remainder interest. Plus, charitable remainder trusts can be funded with highly appreciated stock, which can then be sold in the trust without capital gains tax consequences upon sale.

Ideal when: you want to set up a fixed income stream for your retirement, and also plan a large charitable gift.

Charitable Lead Trusts

Like charitable remainder trusts, charitable lead trusts are split interest trusts, carry similar setup and administrative costs, and offer the same flexibility in terms of annuity or unitrust payments.

A charitable lead trust pays an income stream to a charity for a set term of years, and, at the end of the trust term, the remainder is paid out to an individual or individuals. When the trust is funded, the donor receives a gift tax deduction based on the actuarial value of the income stream to the charity.

Ideal when: you do not need the income stream from the donated assets, and would rather support a charity for a number of years before passing the remainder on to heirs.

Donor-advised Funds

A donor-advised fund (“DAF”) is an account that is part of a public charity to which an individual can donate securities and receive a charitable income tax deduction, even if those funds aren’t immediately distributed to a charitable organization.

The donor then acts as an advisor to the account, making suggestions about when to make grants, which charities should receive grants, and how much to give. This provides a means for ongoing philanthropic involvement for the donor and his or her family. DAFs are also good vehicles for donors wanting anonymity, since grants can be made anonymously.

DAFs are simple to establish and have no initial set-up costs, although operating costs and initial minimum funding amount vary depending on the fund. The main drawback is that the donor serves only as an advisor and does not have total control over the management and administration of the fund.

Ideal when: you’d like to continuously evaluate and adjust where your philanthropic dollars go.

Private Foundations

The most complex form of charitable giving, private foundations are charitable entities established as either corporations or charitable trusts. They must obtain tax-exempt status from the IRS, and must file annual tax returns.

Donors to private foundations receive an immediate charitable deduction of up to 30% of AGI for cash gifts and up to 20% of AGI for securities. This also serves to remove assets from the donor’s estate, potentially reducing future estate tax liability.

A private foundation can also enable a donor to pass philanthropic values on to future generations, since the donor and his or her family can have ongoing involvement in the foundation’s administration, the selection of grantees, and the management of the investments.

But because private foundations are governed by complex tax regulations, establishing and running one requires expert tax and legal counsel. Among other requirements, private foundations must distribute approximately 5% of their assets each year, and are subject to penalties if they fail to do so. They also must pay a flat excise tax of 1.39% on their income.

Ideal when: donors intend to contribute upwards of a million dollars, and are willing to secure the necessary tax and legal advice to run the foundation properly

Other Gifting Considerations

In order to take a charitable deduction on one’s income tax return, a donor must itemize deductions.  However, due to the recent tax law changes which increased the standard deduction, fewer people are likely to itemize.  With this change in mind, a donor may want to consider bunching charitable gifts.  For example, rather than giving smaller amounts every year, a donor may want to give a larger amount once every 2-3 years, depending on the size of the gifts and the donor’s circumstances.

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