For most, the holidays represent a season of giving. Although giving to family and friends occupies most of our attention, charitable giving also plays a significant role at this time of year.
From a tax and financial planning perspective, incorporating charitable giving into one’s year end activities can make a lot of fiscal sense. As each year comes to a close we are all faced with the daunting reality that come January 1st, our tax bill for the previous year will be set in stone. This idea of Uncle Sam gaining control over our hard earned wealth can put a damper on most anyone’s Holiday cheer.
Generally, there are really only three options for the use of our wealth. 1) Retain for personal use; 2) Give for the benefit of others; or 3) Pay our fair share to Uncle Sam in the form of taxes.
Viewed from a lens of “control”, these options break down as follows:
- Retain wealth for Personal / Family use – Family has maximum control as to how wealth is used
- Give to Charity – Within specific legal parameters, family can control how wealth is used
- Government / Taxes – Other than their vote, a family has little if any control on how wealth is used
By giving to charity at year end, a family receives the two fold benefit of 1) lowering their impending tax bill while also 2) increasing control over how their wealth is ultimately used. In essence, charitable planning is the incorporation of various tools and strategies that help families maximize the control of their wealth while simultaneously minimizing their taxes.
Year-end giving can take many different forms. Often a family will give to their own foundation (e.g. a Donor Advised Fund or Private Foundation) which will give them the immediate tax benefits yet still allow for the family, on their time schedule, to control how those assets are ultimately philanthropically used.
Philanthropy undertaken through the family’s foundation can be much more than just grant making. “Family philanthropy” can play a significant role in preparing subsequent generations to be responsible managers of the family wealth, while also serving as an effective forum for the establishment and continuity of the values and traditions important to you.
For example, the family’s philanthropic dollars can:
- Serve as an avenue for learning:
- Board Governance;
- Wealth Management; and
- Principles of “sustainable spending”.
- Establish meaningful purposes for wealth beyond one’s self;
- Counteract complacency by awakening personalized ambitions to “make a meaningful difference” in the world;
- Provide a natural outlet for the expression of the “family story”, the “lessons learned” along the way, as well as the “virtues” and the “values” which have proven instrumental in contributing to the family’s success; and
- Foster a deepened connection amongst family members while encouraging meaningful conversation across generations.
In summary, engaging the family in philanthropy can play a significant role in preparing subsequent generations to be responsible managers of the family wealth, while also serving as an effective forum for the establishment and continuity of the values and traditions most important to the family.
If the comfort of a future income is desired, charitable planning can also take the form of a charitable remainder trust, charitable gift annuity or pooled income fund, strategies which provide the immediate income tax benefits derived from a charitable gift while also providing the desired future income stream.
If maximizing control over the stewardship of your wealth is important to you, don’t forget to talk to your financial advisor about incorporating charitable tax planning into your year - end giving and New Year’s planning.