Investors contemplating their charitable giving for 2022 might find themselves in a different financial situation than last year, when the stock market was reaching new highs and many people had highly appreciated gains that were easy to gift.
This year, the stock market has been stuck in more sluggish territory, affecting the amount of investors’ capital gains and possibly making them less incentivized to donate because of the reduced tax benefit.
Of course, it goes without saying that charitable giving should be viewed as more than just a tax strategy. For many of us, the end of the year often inspires a mood of reflection and gratitude, as we look outward to see how we can make a positive impact through charitable giving.
Regardless of what methods we turn to for our generosity, what’s most important is that each of us does something. As I interact with clients, friends and family this season, I hear of various ways that they’ve chosen to make a difference. Some volunteer individually or with their family members, helping to instill charitable values in them; others give tangible assets instead of money.
For those who prefer to donate money, though, there are a number of mechanisms for charitable giving that continue to be a sound financial strategy, regardless of how the stock market is doing in a particular year.
Charitable giving through donor-advised funds
These accounts, established through a third-party sponsor, are a popular method for donors to do charitable giving, allowing them to receive tax benefits in the current year while donating on a schedule that best suits them. The third-party sponsor, typically a public charity or foundation, administers the fund and makes donations to registered 501(c)(3) organizations as requested by the donor — with final approval from the sponsoring organization.
When money is transferred into a donor-advised fund, it can’t be transferred back out and can only be used to benefit a qualified charity. But a donor can choose how much and when they give money, and the process of donating is as simple as recommending a grant through the online platform, making a phone call or sending an email — the sponsoring organization will handle it all. Our own Argent Foundation is a sponsoring organization, and in my work with donors, I’ve enjoyed seeing how clients use donor-advised funds to benefit their churches, favorite nonprofits and other good causes.
Charitable lead trusts and charitable remainder trusts
These two types of tax-exempt irrevocable trusts, often referred to as CLTs and CRTs, are another way for donors to receive a current tax benefit while donating on a schedule of their choosing. In contrast with donor-advised funds, CLTs and CRTs are typically used in conjunction with estate planning, with donations sometimes triggered by the death of the donor.
With a CLT, one or more charities are named as recipients of regular payments from the trust, usually over a period of years, after which the remaining balance is either paid back to the donor or their beneficiaries. A CRT works in the opposite order: The trust disperses money to noncharitable beneficiaries for a set amount of time, and at the end of that period, the remainder is donated to a charity or charities.
Each type of trust has its benefits. CRTs can help to reduce an individual’s taxable income, while a CLT is designed to reduce the estate taxes a beneficiary might pay upon inheriting money. When interest rates are low, as they were last year, investors often favor CLTs. However, when interest rates are high (which they’re moving to now), CRTs tend to be more advantageous on a tax level.
How Heritage can help
If you’re interested in exploring charitable giving options, our advisors at Heritage are glad to help however we can. Not only can we provide advice on the benefits of a particular vehicle for donations, we are happy to work with your attorney and/or CPA to find the best options for including charitable aspects in your estate.
This holiday season, I hope that however you choose to donate, you do it in a way that feels right for you. For those of us to whom much has been given, the act of giving can bring its own emotional rewards. I’m reminded of a quote by author Cory Allen:
“Gratitude grounds us. Focusing on the good things in your life shifts your perspective. It keeps you from overlooking the gifts that are easy to take for granted. Which makes you feel more generous, compassionate, and whole.”