Despite the worry that the increase in the standard deduction under the Tax Cuts and Jobs Act would negatively impact philanthropic activities, charitable giving has continued to increase since 2018. This suggests that charitable giving is still important to many of your clients. Historically, 30 percent of charitable giving activity takes place during the holidays, so December is the perfect time to help clients incorporate their philanthropic desires into their estate plan.

What Kind of Charitable Giver Is Your Client?

Today’s charitable givers are a diverse group, varying in scope and engagement levels. For simplicity’s sake, we have divided givers into four categories: reactive donating, charitable giving, philanthropic investing, and strategic philanthropy.

How active your client wants to be in their charitable giving and the size of their estate should determine their charitable giving strategy. Clients who fall more on the left side of this graph will require considerably less planning and will have lower start-up and administration costs. Clients who fall more on the right side will require larger estates for philanthropic funding, as well as the ability and desire for greater personal involvement.

Establishing a Giving Strategy

A client’s charitable giving strategy should balance what is in the client’s best interest while also carrying out the client’s philanthropic wishes. Lifetime giving allows active clients to be more involved in their charitable giving and offers the opportunity for income tax deductions. Giving through wills and trusts allows clients to give after their death and potentially reduce their estate tax liability.

In light of the Tax Cuts and Jobs Act’s increase of the standard deduction and doubling of the estate tax exemption, the tax savings previously afforded by charitable giving is greatly reduced for many people. In today’s environment, your charitable giving strategies may consist of a combination of lifetime and postdeath giving to maximize the tax benefits available to your clients.

The Most Popular Types of Charitable Planning

Donor-advised funds. Establishing a donor-advised fund (DAF) allows clients to be as active as they want to be in their philanthropy while giving them an immediate tax benefit. DAFs are generally easily established with public charities, and clients can recommend grants from the fund over time. More active clients can track return on investment of grants and research and engage with grantees. The strategic philanthropist can leverage involvement with other funds or a private foundation.

Make note: this option may not be right for clients who want total control over how the donated funds are used. When using a DAF, clients are essentially “advisors” who can make suggestions on how the charity might use their donations, but the final decision is ultimately up to the charity.

Private foundations. This charitable giving strategy is best-suited for philanthropic legacies over $1 million. It is a great option for clients who want to employ their family in their gifting legacy. This option allows for the greatest control over the investment and distribution of donated funds. Private foundations also give clients the option to compensate board members for their work and make international grants.

Private foundations and DAFs can be used in conjunction with each other to achieve a desired result. Because private foundations have an annual minimum distribution requirement, a DAF can be useful as a backup receptacle for these distributions. A DAF can also provide anonymity to a donation, a feature that is lacking from private foundation distributions. Additionally, there may be tax benefits to contributing certain assets to one type of vehicle over the other, allowing them to further complement each other.

Charitable Remainder and Charitable Lead Trusts

Charitable remainder trusts (CRT) and charitable lead trusts (CLT) operate within the same premise. Both are irrevocable, which means once an asset is placed in the trust, it cannot be removed by the grantor. Accordingly, these trusts should only be funded with assets that your client can afford to give. Both provide for a stream of income to be distributed to a designated party during the term of the trust and for the remaining trust assets to be distributed when the trust terminates. The difference lies in each trust’s distribution priorities.

Under a CLT, the charity receives the income interest, while the beneficiaries receive their disbursement only once the trust terminates. A CRT is the opposite, with the beneficiaries receiving the income interest up front and the charity collecting the trust’s remaining assets at the end of the trust’s term. There are also significant differences in the income tax deductions available under these two types of trusts. A careful evaluation of your client’s philanthropic wishes, financial affairs, and tax situation will help you determine which strategy is appropriate to suggest.

Wealth Docx^® Charitable Planning Module

Wealth Docx is the premier legal document drafting tool designed by attorneys, for attorneys. To meet all of your charitable planning needs, our charitable planning module offers a variety of document templates, including the following:

• Gift annuity agreement
• Gift agreement
• Life estate reserved deed
• Maintenance and ownership agreement
• Charitable remainder trust
• Charitable lead annuity trust
• Charitable lead unitrust
• Charitable lead trust
• Charitable remainder annuity trust
• Charitable remainder unitrust
• Private foundations

See Wealth Docx in action by scheduling a demo today.