Planning your charitable legacy

For many people, charitable giving is a central, vital part of their financial lives. Oſten they make spontaneous giſts of cash, frequently in response to a charity’s solicitation. Yet ad hoc giving, however generous, may be less than optimal for donors and charities alike, says Jennifer Erdelyi, Head of Charitable Planning in the Planning Center of Excellence at Bank of America Private Bank.

Erdelyi, whose experience includes working closely with both individuals and charitable organizations, advocates a more deliberate, strategic approach. Charitable planning, she says, considers your broader philanthropic and wealth planning goals as well as the full range of your assets, whether cash, appreciated securities, business interests, art or real estate. Here, Erdelyi discusses the advantages of this holistic view of philanthropy.

How can charitable planning help individuals and families pursue their philanthropic goals?

We look for opportunities for clients to achieve their goals in the most tax-advantageous way possible. A charitable plan can complement estate planning and help instill a passion for giving in the next generation. In addition to developing and implementing your philanthropic vision, we focus on those aspects of charitable planning that are purely technical. Given that there’s a tax deduction for charitable giſts, how will you put that to work? For example, will the benefit be greater if you give appreciated assets instead of cash?

The first step is to define your philanthropic goals and how you would like to allocate your giving dollars. What’s most important to you in carrying out your values? How do you want to be remembered? What behaviors and values do you want to model for your children? And how can you incorporate your charitable vision into your broader wealth planning?

What tools and strategies can help philanthropists align their charitable goals with other wealth planning objectives?

There are many approaches that can help, depending on your situation and your goals. One approach involves split-interest trusts, which, as the name implies, are designed to benefit multiple parties. With a charitable remainder trust (CRT), income from trust assets goes to the person who established it—the grantor—or to a beneficiary the grantor chooses. At the end of the trust’s term—oſten the grantor’s lifetime—the remaining assets in the trust go to a designated charitable organization. Alternatively, with a charitable lead trust (CLT), the charity gets the first benefit, and your chosen beneficiary receives the assets that remain when the trust term ends.

Both options let you provide a financial benefit to a charity while also generating income for yourself or a family member. Yet there are important differences, and the approach you choose will depend on the nature of your assets, your tax situation and your goals.

What determines whether a CRT or a CLT is the better choice?

A CRT may be useful if you have a concentrated stock position that you want to diversify while benefiting charity. If you contribute appreciated stock to the trust, the trust can sell it—and because the trust is tax-exempt, it doesn’t have to pay capital gains taxes on the sale. Then the proceeds from the sale can be reinvested in a diversified portfolio within the trust. Income that’s generated by that portfolio is distributed by the trust to you or a family member. Although this income is taxable, spreading it out over time helps avoid the immediate tax impact that would otherwise come when the stock is sold.

A CLT can be a great strategy to reduce wealth transfer taxes on the giſt to family or heirs that occurs aſter the initial term of the trust, when your selected charity has benefited. A CLT is particularly well suited for assets that generate passive income and are expected to appreciate. This type of trust can also be structured to provide a charitable income tax deduction when it makes sense from a tax perspective.

The choice between a CRT and a CLT can become clearer aſter considering your tax situation, giſting intent and charitable goals. These trusts are sophisticated planning techniques, so be sure to consult your advisor as well as an attorney who is experienced in creating charitable trusts.

How could charitable planning help if you’re selling your business?

As with any appreciated asset, there can be a significant tax advantage to donating an interest in a business. Some charitable organizations may not be able to accept the giſt directly because they’re not in a position to sell it. But most donor-advised funds (DAFs) can receive an interest in a business or other kinds of complex assets such as real estate. You could receive an immediate deduction for the value of the business, and then you can decide later how you would like the DAF to distribute the sale proceeds to charitable organizations you support.

Consider the possible tax advantages of donating a business interest. If you sell it, you’ll be taxed on the appreciation in its value, likely at a capital gains rate of 20%. There may also be a net investment income tax of 3.8%, plus possible state taxes. If you then give the aſter-tax proceeds to charity, your tax deduction for that giſt will be substantially lower than the fair market value of the business interest. Donating the business interest directly to a nonprofit or a DAF will give you a larger deduction—and result in a greater benefit for charity. Timing is critical with this type of strategy, so be sure to engage your advisors well in advance of a planned sale.

How can charitable planning encourage philanthropy in the next generation?

Charitable planning can be a great opportunity to collaborate with your children and grandchildren on something you’re passionate about, to work together on building something that’s bigger than your family. In some cases, where the next generation doesn’t share the parents’ particular philanthropic interests, a solution is to create separate DAFs for each of the children, giving them the resources to forge their own philanthropic paths. In the right circumstances, a family foundation can also bring the family together, offering you and your children the chance to work side by side in a cohesive way to support a philanthropic goal.

What are the first steps in creating a charitable plan?

For this process to be successful, it’s important to look at your family’s full picture—your financial situation; your assets and the tax basis of those assets; how your children are doing financially and how you would like to support them; what your philanthropic interests are; and what kind of legacy you want to leave. Only by having a broader conversation about that pertinent information can we begin to help create a strategy that addresses all of your charitable and other goals in a tax-advantageous way. And the sooner that discussion happens, the more likely your objectives can be achieved.

How can Bank of America help?

As one of the nation’s first dedicated advisors to philanthropists and nonprofit institutions, Bank of America offers resources to help align your charitable interests with your broader financial and tax structure. Our team of advisors and wealth strategists works with you to match your philanthropic goals with a planning strategy that can help maximize the benefit of your charitable contributions — from a tax standpoint, for the causes you support, for your sense of personal fulfillment, and to help ensure that your giving fits seamlessly with your other financial goals.