Strategic Charitable Giving: How to Maximize Impact While Minimizing Tax Liability

November 20, 2024

Partaking in charitable giving is a wonderful way to support the causes that matter most to you. In addition to directly impacting organizations that align with your values, charitable donations also offer a valuable opportunity to reduce your tax liability when done strategically. Through careful planning, your charitable contributions can make a meaningful difference while also minimizing your tax burden. 

Explore ways to optimize charitable contributions, such as donating appreciated assets, establishing donor-advised funds, and setting up charitable trusts to ensure your giving is impactful and tax-efficient while aligning with your financial goals.

Methods for Maximizing the Impact of Charitable Contributions

Here are methods to consider that can help strengthen the impact of your charitable giving and reduce your tax liabilities.

1. Donating Appreciated Assets

One of the most effective ways to optimize charitable donations is by giving appreciated assets, such as stocks, bonds, or real estate. If you donate these assets directly to a charity, you can avoid capital gains taxes, which would be incurred if you sold the asset. Additionally, you can claim a tax deduction for the asset’s fair market value, provided you’ve held it for more than a year.

This means you get a significant tax deduction without having to recognize the taxable income associated with the sale of the appreciated asset. Donating appreciated assets lets you donate more without increasing taxes by avoiding capital gains taxes and taking advantage of a deduction for charitable contributions.

2. Creating a Donor-Advised Fund (DAF)

A Donor-Advised Fund (DAF) is a flexible and efficient way to manage charitable giving over time. When you contribute to a DAF, you receive an immediate tax deduction for the donation, but you can recommend grants to specific charities on your own timetable. A donor-advised fund lets you make a large donation up front, which is especially helpful in high-income years when you’re looking to lower your taxable income while keeping the flexibility to decide when and how the funds are distributed to charities.

Moreover, the assets in a DAF can be invested¹, potentially growing tax-free, which increases the value of your charitable donations. This strategy is ideal for those who want to balance immediate tax savings with long-term philanthropic goals.

3. Establishing Charitable Trusts

Charitable trusts² are another strategic tool for integrating philanthropy with long-term financial planning. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) are two common philanthropic trusts.

• Charitable Remainder Trust (CRT): With a CRT, you can transfer assets into a trust that provides income for you or your beneficiaries for a set period. Afterward, the remaining assets go to a charity of your choice. This structure allows you to receive a charity tax deduction for the present value of the donation, avoid immediate capital gains taxes on appreciated assets, and create an income stream.
• Charitable Lead Trust (CLT): On the other hand, a CLT works in an opposite manner than a CRT. With a CLT, the charity receives income from the trust for a set period, and after that period, the leftover assets are passed on to your beneficiaries. CLTs are an excellent way to reduce or even eliminate gift and estate taxes while supporting charitable causes.

Charitable trusts, while more intricate, offer a highly effective method to merge philanthropy with tax planning. We strongly recommend consulting with a professional when establishing one to ensure it aligns with your financial and charitable goals.

Aligning Charitable Giving with Financial Goals

At First Western Trust, we have extensive experience integrating charitable giving into our clients’ overall financial strategies. Whether donating appreciated assets, establishing donor-advised funds, or creating charitable trusts, we ensure that your contributions align with your values and financial goals.

Conclusion

Strategic charitable giving offers a significant opportunity to support causes that are important to you while minimizing your tax liability. By donating appreciated assets, setting up donor-advised funds, or forming philanthropic trusts, you can reduce your taxable income and increase the impact of your contributions.

When seeking charitable contribution deductions, it’s important to review the current laws and regulations set by the IRS. First Western Trust is here to help you ensure that your contributions not only benefit your financial situation but also comply with the latest IRS regulations while making a meaningful impact on the causes you value. With a dedicated team of professionals, we offer customized solutions to help you navigate charitable giving in a way that aligns with your financial goals and preserves your wealth. Let us assist you in making your philanthropic efforts both strategic and impactful.

1. Investment Products are not a deposit, not guaranteed by the Bank, May Lose Value
2. Please consider the philanthropic aims and tax implications before establishing a philanthropic trust.

Philanthropy Services are offered through First Western Trust, ensuring a strategic approach to your charitable efforts.