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Charitable Vehicle Options for High Income Years
Published Date : July 31, 2018
For entrepreneurs and major stakeholders of Silicon Valley companies, a liquidity event puts in motion a series of complex and timely actions that investors must navigate, including potentially large tax bills to manage. For the philanthropically minded, one related tax-saving strategy worth exploring is the funding of a charitable vehicle. There are a handful of options available with varying benefits, so let’s explore how best to approach this decision-making process.
To make a thoughtful decision, there are three areas to cover: 1) What are the prerequisites that make charitable vehicles attractive and do they apply to me? 2) Besides charitable giving, what is my goal for funding such a vehicle? 3) What are the various charitable vehicles available and what are their strengths and weaknesses?
The most important prerequisite for considering a charitable vehicle is having an existing desire to practice philanthropy, regardless of the liquidity event at hand. If this is true, then using highly appreciated securities or property to fund a charitable asset, combined with the desire and need to mitigate near-term taxes, makes funding such a vehicle very attractive. In addition to maximizing tax savings via charitable deductions, some donors might put emphasis on the importance of using a vehicle that provides an annuity income stream and/or one that provides grantmaking flexibility. While there are many options to consider in greater depth with your Wealth Manager, here are the high-level strengths and weaknesses of the most commonly used vehicles to help narrow the search for the option that makes the most sense for you:
- Donor Advised Fund: Pros – maximum tax efficiency and low cost, with ability to delay gifting to charities while receiving upfront tax deduction. Cons – grants cannot be made to private foundations, individuals, or political parties; and grants cannot provide personal benefit to the account owner (tuition payments, membership fees, goods, or services); and no income/annuity feature.
- Private Foundation: Pros – maximum control and flexibility of contribution management, investing, and grant making activity. Cons – limited tax efficiency, high cost to implement/administer, and required public disclosure of foundation activity and directors.
- Direct Giving: Pros – maximum tax efficiency. Cons – requires self-management of the giving process to specific organization(s) in a single tax year.
- Charitable Remainder Trust: Pros – maximum control of annuity income stream and beneficiary/trustee designations. Cons – limited tax efficiency, high cost of implementation, and ongoing administration.
- Charitable Gift Annuities: Pros – great tool for generating annuity income with low or no cost. Cons – donations limited to a single organization and limited tax efficiency.
The decision to create and fund any type of charitable vehicle intersects three areas where professional coordination is typically helpful: legal, financial, and tax. Often the conversation begins with your Wealth Manager where goals are discussed, charitable options reviewed, and stress tests are calculated to ensure sustainable giving. Once a rough plan is in place, the discussion is expanded to your estate planning attorney and tax advisor. All three professional team members would then coordinate to ensure all considerations are reviewed and the optimum plan is put in place to efficiently accomplish your goals.
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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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- – SEP IRA or Individual 401(k)? A Question Worth Exploring for the Self-Employed
- – Donor-Advised Funds Considerations to Help Accomplish Your Philanthropic Goals
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