Philanthropy and Wealth Planning: How to Build a Charitable Giving Strategy

December 15, 2024

Incorporating charitable giving into a comprehensive wealth management plan can offer significant tax benefits while aligning your financial legacy with the causes that matter most to you. At First Western Trust, we help clients design charitable giving strategies that maximize benefits both for the organizations they support and their own wealth plans. Here, we’ll discuss how to build a philanthropic strategy that enhances your legacy, leverages tax advantages, and ensures that your wealth has a meaningful impact.

Why Charitable Giving Matters in Wealth Management

Philanthropy allows you to make a difference, but it can also be a valuable part of your financial strategy. By integrating charitable giving into your wealth management plan, you can optimize tax efficiency, strengthen your legacy, and influence the world for years to come. When planned strategically, charitable contributions can help reduce income, capital gains, and estate taxes, making philanthropy a powerful tool not only for giving but also for preserving wealth.

Key Approaches to Charitable Giving

A personalized charitable giving plan provides flexibility and control over how and when you give. Here are some of the primary tools that high-net-worth individuals often use to structure their philanthropy effectively:

1. Donor-Advised Funds (DAFs)
Donor-advised funds are one of the most flexible and tax-efficient ways to manage your charitable giving. These funds allow you to contribute assets—such as cash, stocks, or real estate—into an account designated for charitable purposes. You can claim an immediate tax deduction, even if you choose to distribute the funds to charities over time.

Key benefits of DAFs include:

• Tax Advantages: Contributions are eligible for an immediate tax deduction. Contributing appreciated assets, such as stocks, may allow you to avoid capital gains tax, making DAFs particularly appealing for those with highly appreciated portfolios.
• Flexibility and Control: DAFs enable you to make donations on a timeline that suits your giving goals. You can also invest the funds to grow tax-free, maximizing the impact of your charitable contributions.
• Legacy Opportunities: Many high-net-worth individuals use DAFs as a way to involve family members in philanthropy, building a legacy of giving that can extend to future generations.

2. Private Foundations
For those seeking greater control and influence over their philanthropy, private foundations offer a way to make a significant impact. Foundations provide the freedom to support a wide range of causes, including grants, scholarships, and charitable programs that align with your vision.

Considerations for private foundations include:

• Control and Customization: Foundations allow you to establish your own board of directors, set specific grant guidelines, and control the timing and allocation of funds. This flexibility makes them ideal for individuals with a clear vision for their charitable impact.
• Tax Deductions: Contributions to a private foundation qualify for tax deductions, though there are different rules and limits compared to DAFs. As with DAFs, contributing appreciated assets can reduce capital gains taxes.
• Legacy and Family Involvement: Many families use private foundations to instill philanthropic values across generations, fostering a culture of giving that endures beyond the founders’ lifetimes.

Setting up and managing a foundation requires careful planning and compliance with regulatory requirements, but First Western Trust’s team can guide you through the complexities of this process to help ensure your foundation’s success.

3. Charitable Trusts
Charitable trusts, such as charitable remainder trusts (CRTs) and charitable lead trusts (CLTs), offer options for structured giving that provide both philanthropic and financial benefits.

• Charitable Remainder Trusts (CRTs): A CRT allows you to donate assets to a trust that pays you (or other beneficiaries) income for a specified term or life. At the end of the term, the remaining assets pass to your designated charity. CRTs provide an income stream, potential tax deductions, and can help you defer capital gains taxes on appreciated assets.Charitable Lead Trusts (CLTs): With a CLT, the charity receives income from the trust for a specified term, after which the remaining assets pass to family members or other beneficiaries. CLTs are often used in estate planning to reduce gift or estate taxes, making them a valuable tool for wealth transfer.

Charitable trusts can be an ideal solution for those who want to balance philanthropy with the financial needs of their families. They allow you to make an impact today while preserving assets for future generations.

4. Direct Gifting Strategies
Direct gifts to charities remain a simple and effective way to make an impact and enjoy tax benefits. Direct giving is often an ideal choice for annual gifts to organizations you support regularly, such as local charities, alma maters, or religious institutions. For major gifts, however, using a structured giving vehicle, such as a trust or DAF, often provides more tax and estate planning advantages.

Tax Strategies for Charitable Giving

Integrating charitable giving into your wealth plan provides many tax benefits, especially for high-net-worth individuals. Some effective tax strategies include:

• Reducing Income Taxes: Charitable contributions may allow you to offset up to 60% of your adjusted gross income when using cash gifts and up to 30% for assets like securities.
• Minimizing Capital Gains Taxes: By donating appreciated assets, such as stocks or real estate, directly to a charity, you can avoid paying capital gains taxes on the asset’s appreciation, while still receiving a charitable deduction for its fair market value.
• Lowering Estate Taxes: Charitable contributions can also reduce your taxable estate, making philanthropy an essential part of estate planning for high-net-worth individuals. Trusts, foundations, and other planned giving tools allow you to pass wealth efficiently, supporting your heirs while minimizing tax liabilities.

At First Western Trust, our team helps clients create a tax-smart charitable giving strategy that maximizes impact while preserving and transferring wealth in the most efficient way possible.

Building Your Philanthropic Legacy

Philanthropy isn’t just about giving today—it’s about establishing a legacy of positive change that endures. Many high-net-worth families choose to involve younger generations in charitable planning to instill a sense of purpose and financial stewardship. Donor-advised funds, family foundations, and even charitable trusts can help create a structure for involving family members in philanthropic decision-making, fostering a legacy of giving that extends well into the future.

For those looking to deepen family involvement, consider setting up family meetings to discuss giving priorities, reviewing impact reports, and aligning philanthropy with shared values. Engaging in thoughtful philanthropy as a family can not only strengthen bonds but also build a legacy that represents your values and commitment to making a difference.

Begin Your Charitable Giving Strategy Today

At First Western Trust, we specialize in helping high-net-worth clients develop comprehensive charitable giving strategies that reflect their values, maximize tax benefits, and ensure a meaningful legacy. By aligning philanthropy with your broader wealth plan, you can create a strategy that not only benefits your chosen causes but also supports your financial goals, protects your estate, and strengthens family ties.

Reach out to us today to begin building a philanthropic legacy that reflects your values and ensures your wealth has a lasting, positive impact for generations to come.

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First Western Trust Bank cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.