Philanthropy: Comparing Charitable Giving Strategies

Charitable giving strategies are an important part of financial planning for many individuals and families. These strategies can provide significant tax benefits, help manage wealth, and create a lasting philanthropic legacy. This article will compare four popular charitable giving strategies: Charitable Remainder Trusts (CRTs), Charitable Lead Trusts (CLTs), Donor Advised Funds (DAFs), and Private Foundations.

Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust is a type of irrevocable split-interest trust designed to provide donors with annual income from donated assets for life or a specified term, while ultimately benefiting a charity. The term "Split-interest" refers to the fact that a part of the interest goes to charity and a part does not.

Key Advantages:

• Tax Advantages: CRTs offer tax benefits in the form of a partial income tax deduction based on the present value of the charitable remainder, alongside the satisfaction of contributing to a cause close to your heart.

• Income Stream: You can use the CRT as a stream of income if you (the grantor) or a beneficiary choose to contribute assets.

• Deferral or elimination of capital gains tax on contributed assets

• Philanthropic Impact: CRTs are a compelling way for the grantor to make meaningful contributions while ensuring their financial future.

Considerations:

• Irrevocability: Once established, CRTs are irrevocable—they cannot be dissolved3.

• Complexity and Costs: Setting up a CRT is only the first step. The trust will also require professional accounting and tax services on an ongoing basis.

Example:

After selling a significant stake in her closely held company, Susan works with her advisors to contribute $10 million of appreciated stock into a CRT. The trust provides her with 5% annual income for life, avoids immediate capital gains taxation, and generates an upfront charitable deduction. The remainder will eventually pass to a foundation supporting cancer research, aligning with Susan’s long-term philanthropic vision.

Charitable Lead Trusts (CLTs)

A Charitable Lead Trust (CLT) is a powerful estate planning tool for families looking to reduce future estate and gift taxes while advancing their philanthropic goals today. In contrast to a CRT, a CLT directs income to a charity for a fixed term, after which the remaining assets revert to heirs—often with minimal transfer tax implications.

CLTs are particularly effective in low-interest rate environments or as part of a generational wealth transfer strategy. They enable families to “lend” assets to philanthropy for a term while preserving long-term family capital.

Key Advantages:

• Tax Benefits: CLTs present beneficiaries with possible tax benefits, such as an income tax deduction for charitable donations and savings on estate and gift taxes.

• Philanthropic Impact: CLTs allow you to convert substantial assets into lifelong income, providing a win-win situation for both you and the charitable beneficiary of your choice.

• Assets appreciating outside of the taxable estate

Considerations:

• Irrevocability: The transfer of assets into the trust cannot be reversed.

• Establishing and Maintaining Costs: Establishing and maintaining the trust can be costly.

• No immediate income tax deduction unless structured as a "grantor" CLT

Example:

The Smith family establishes a 20-year CLT funded with $25 million in municipal bonds. The trust distributes $1 million annually to a network of children’s hospitals. At the end of the term, the remaining assets—now appreciated and outside the estate—transfer to their grandchildren. By locking in this structure today, the Smiths advance their philanthropic legacy while mitigating future estate tax exposure.

Donor Advised Funds (DAFs)

A Donor Advised Fund is a vehicle that allows investors to donate long term appreciated securities directly to a charitable fund which is structured as a 501c(3) public charity . This particular structure is simple for the donor and allows allows some control over how the investments in the DAF are managed. Some DAFs may accept select private assets such as business or real estate depending on the asset and the policies of the DAF.

Key Advantages:

• Immediate tax deduction at the time of contribution

• Avoidance of capital gains tax on donated long term appreciated securities

• Low administrative burden

Considerations:

• You can advise on grants, but the sponsoring organization retains final say

• Control over how investments are managed inside the DAF can be limited depending on the custodian used and the amount in the account.

Example:

Sharon’s financial plan involves donating approximately $100,000 per year to her favorite charity. By working with her financial and tax advisors, she learns that she can contribute a number of future years giving in one tax year in which her tax advisor feels it is particularly advantageous. After consulting with her advisors, Sharon decides to front load 10 years of giving ($1,000,000) in long-term appreciated technology stock to her DAF. She is able to immediately diversify this position while avoiding capital gains tax. Going forward each year she recommends a grant to her charity of choice from her DAF.  As her philanthropic goals evolve over time, she is able to gift to her DAF (a 501c3 charity) taking advantage of the higher AGI limits and saving on taxes in the years that matter most to her, while also supporting the charity she cares about in the way she always has.

Private Foundations

A Private Foundation is a nonprofit organization established and funded by a family or an individual.

Key Advantages:

• Control and Legacy: One of the primary benefits of starting a private family foundation is the level of control it provides9.

• Tax Benefits: Private family foundations often come with substantial tax benefits.

Considerations:

• Transfer of Assets is Irrevocable: Once you establish a foundation, you have the authority to determine its mission, structure and how funds are allocated.

• Establishing and Maintaining Costs: Foundations require a substantial amount of time, work, and money to establish and maintain.

Example:

George and his wife Kathryn saw philanthropy as not only a way to give back to the community, but also as a way to give their growing children exposure to how both George and Kathryn handle investment decisions, work with tax and legal advisors, and handle charitable requests from the community. They then worked with their estate planning firm and decided that a private foundation was the best option for them. From their private foundation they wish to fund scholarships at their alma mater and to support local arts initiatives. To help them do this, they appoint family members to the board, ensuring long-term involvement in the foundation's mission. On a regular basis, not less than yearly, George, Kathryn, and their children meet for a board meeting and proactively consider grant requests, decide which charities they will continue to support, which they will no longer support, and how the investment manager is performing. As the years go by, George and Kathryn are able to teach their children the skills needed to make complex decisions involving capital which is helping to prepare the kids for the inheritance that will come in the future while also supporting charities in the community.

In conclusion, each of these charitable giving strategies has its own unique set of advantages and disadvantages. It’s important to carefully consider your financial situation, philanthropic goals, and the level of control you wish to maintain over your charitable contributions when choosing the strategy that’s right for you.