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A Guide to Incorporating Philanthropy into Your Financial Planning

A Guide to Incorporating Philanthropy into Your Financial Planning

November 22, 2022
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If you're considering giving back to society or a cause as part of your financial planning, there are many ways you can do so. You can make an impact while receiving tax benefits by including philanthropic giving as part of a holistic approach to charitable giving in your financial plan. Philanthropic giving addresses the root cause of social issues and requires a more strategic, long-term strategy. Philanthropic giving often includes inviting younger generations to participate to become part of a family's legacy. Here are actions to guide you as you work towards having philanthropy as part of your financial planning:

Identify Your Values

Determine your reason for giving and what you want to change. Since philanthropy is giving over time, determine how long you want to give and if you want it as part of your family's legacy for the next generation to manage.

Define Your Goals

Your financial professional can help you define your goals and implement a giving plan as part of your financial plan. Each year, evaluate how much you intend to give and when. Depending on your circumstances, you may include a giving schedule, such as quarterly or a one-time contribution each year. Other things to consider when defining your philanthropic goals include:

  • Your giving in retirement
  • Giving through your estate plan
  • Including giving as part of a business-exit strategy

Select Your Charities

To ensure a charity is legitimate, ask the charity for details about their mission and how they’ll use your donation. The charity should also provide proof that it’s a 501(c)(3) public charity or private foundation so that your contribution is tax-deductible. As a second fact check on the charity, visit the IRS Tax Exempt Organization Search list to ensure it is a reputable, tax-exempt charity. 

Understand How to Maximize Giving

Financial and tax professionals can help you determine how to maximize the tax advantages of giving. As tax laws change, your financial plan and giving plan may need to revise so that you receive the tax benefits of your gift. Here are a few ways to maximize your giving:

  • Qualified Charitable Distributions (QCDs)- If you're age 70 1/2 or older, you can use a QCD to donate directly from your IRA to the charity of your choice. This strategy allows you to deduct the amount transferred to the charity from your taxable income. You can use a QCD each year versus taking the distribution and paying taxes.
  • Bunch your donations- By making charitable contributions for several years at one time, the total of your itemized deductions may exceed the standard deduction and offer some tax benefits. 
  • Itemize your contributions- Charitable contributions can reduce your tax bill if you choose to itemize when filing your taxes. Work with your tax professional to determine how to itemize your giving if the total of your deductions plus charitable gifts equals more than the standard allowable deduction.

Determine Which Strategies to Use

There are strategies that you can use or establish to help you organize your giving within your financial plan, such as:

  • Donor-Advised Funds (DAF)- A donor-advised fund allows you to donate cash or securities, which are non-refundable, to a nonprofit organization. You may claim a tax deduction for the year you contribute to the DAF rather than the year your contribution goes to the charity. Stay in touch with your financial professional, as proposed legislative changes may impact when donors can receive the tax deduction.
  • Charitable Trusts- A charitable trust allows you to donate assets to a chosen tax-exempt organization to help you minimize taxes. Consult your financial and legal professionals to help you understand how trusts work and if you intend to include giving securities as part of your giving plan.
  • Private Foundations- A private foundation (PF) is a nonprofit charitable entity created by an individual or a business. An initial donation, known as an endowment, is used to generate income to make grants to charities per the foundation's charitable purpose. Consult with your financial, legal, and tax professionals to determine if a PF is appropriate for your situation.

Consider Giving Other Assets

There are other assets you can give to charity as part of your financial plan that is not associated with securities:

  • Real Estate- If you have a property you no longer need, you can donate it to charity. 
  • Cash- With a cash gift, you may receive a tax deduction equal to the amount of money you donated minus the value of any products or services you received.
  • Life insurance- You can name a charity as the beneficiary on your life insurance contract or choose to donate the cash value accumulation each year.
  • Art and collectibles- Often, gifted art and collectibles are auctioned to raise money at charity events. To use either as part of your giving, have a certified appraisal completed with reporting so that you can submit the appraisal information and the donation documentation at tax time, indicating the value of your donation. Consult your tax professional regarding how to value and report these specific assets.

A benefit of including philanthropy in your financial plan is that it helps to ensure that your goals are listed, that a plan implements appropriate strategies, and progress toward your goals is monitored. Contact your financial professional to start your philanthropic planning today.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

LPL Tracking #1-05326016

Sources:

https://www.theamericancollege.edu/news-center/5-ways-financial-advisors-help-charitable-giving

https://www.investopedia.com/financial-edge/1112/the-difference-between-private-foundations-and-public-charities.aspx