The first part of this series on charitable giving focused on gift techniques that required little or no action on the part of the donor. Some donors, however, may want greater control over their gifts. In that case, donors need to use a technique that involves a bit more work on the front end.
One way to maintain more control over both your gift and the way in which it benefits you is to establish a charitable trust. Like a charitable gift annuity, a charitable trust allows you to make a gift while you get something back from the charity. Yet while a gift annuity can give you a stream of current or future income payments, a charitable trust allows you to define, very broadly, exactly what you want back from the trust.
For instance, if you are interested in making a charitable gift and getting back a series of regular payments, you may want to consider a charitable gift annuity. If you talk with a planned-giving specialist at your chosen charity, the specialist will probably ask your age and then run some numbers. The specialist will then report back with an interest rate based on your age and a model of what your projected payments would look like, as well as your current tax deduction.
Now, say that after reviewing the model, you decide that you want to change something, such as taking a higher interest rate back or starting to receive payments at an earlier age. With a charitable gift annuity, the charity may not be able to offer you the flexibility of changing those essential characteristics. It may have only enough capacity to offer a one-size-fits-all product that meets most people's needs adequately. But if you choose to create a charitable trust, you can change the essential characteristics, such as the interest-rate payout.
Another advantage of charitable trusts is that you can name yourself as trustee and then manage the assets yourself. This approach can be extremely useful if you are especially familiar with the assets that you plan to donate to the trust, such as stock in a private company, or real estate, or other relatively illiquid assets. Keep in mind, however, that just because you are the donor and one of the beneficiaries of the trust, that doesn't mean you can invest in whatever you want. As trustee, you have a fiduciary duty to the charity to make sure your investments are sound and prudent. While some charities are reluctant to pursue donors in situations in which the trust's investments have gone sour, at least a few charities are notorious for litigating cases involving a breach of fiduciary duty. To protect yourself from such claims, you may need to diversify your investments in a manner different from the way you invest for your personal account.
Finally, you can include language in a charitable trust that allows you to change which charity will receive the assets at the end of the trust term. Even though some qualified charity must receive the assets, such a provision gives a donor the flexibility to meet the changing needs of the community by directing funds where they may be needed most at a given time.
For people interested in giving away significant amounts of money and playing a more active role in how the recipient will use the money, creating a private foundation may be the best option. Private foundations can provide most of the tax benefits available for charitable gifts while they let the donor keep a large amount of power in determining the way the money gets used.
Setting up a private foundation does, however, require a considerable amount of work. The donor must find people willing to serve on a board of directors and must go to the effort and expense of establishing a separate legal entity for the foundation. The foundation must then submit an application to the IRS to receive recognition as a tax-exempt organization eligible to receive charitable donations. Some people do misuse private foundations as a convenient tax dodge, and so to catch the abusive cases, government agencies require everyone to follow somewhat stringent guidelines for creating and maintaining tax-exempt organizations such as private foundations.
Thus, after a private foundation is formed, it must make regular reports to the IRS. Some states also have substantial reporting requirements of their own.
The benefits of a private foundation, however, can justify the effort in establishing one. By offering assistance to a variety of worthy causes throughout the community, a private foundation can obtain high visibility both for itself and for its founders. A family foundation can not only establish its initial donors as leaders in the community but also introduce the children and grandchildren of those donors to the world of philanthropy. For wealthy donors who are concerned that their descendants may not understand the value of charity, using a private foundation to get their families directly involved in the operations of various charitable organizations can make an abstract concept much more concrete and practical.
The place to start in establishing either a charitable trust or a private foundation is your lawyer, who can then bring together various outside resources to create a plan that works for you.
There will always be a need for people who are willing to sacrifice for the benefit of others. By thinking about the best way to give, you can do your part for your community while you also help yourself and your family.
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