Aligning Charitable Giving, Estate, and Tax Planning

When donors are passionate about a cause, they often look for ways to increase their impact. Integrating charitable giving, estate planning, and tax planning within a holistic wealth management strategy can create financial advantages that benefit both the organization and the donor.

Planned giving vehicles

In 2023, individuals, endowments, foundations, and corporations gave an estimated $557.16 billion to U.S. charities.¹ Most donors are accustomed to writing a check, charging a credit card, or handing over cash. However, other donating strategies may have an even greater potential impact. For example, several planned giving vehicles provide the flexibility to spread charitable contributions across different charities over many years while earning an immediate tax deduction.

These options include:

• Donor-advised funds. Among the fastest-growing charitable giving vehicles in the U.S., donor-advised funds (DAFs) are a great option for all types of givers. At their core, DAFs are investment accounts that can only be used for charitable giving. While the money in the fund is owned and managed by a non-profit entity, DAF donors still have a say in how and to which nonprofits the assets are distributed. The fund owner receives an upfront tax deduction, which can be reinvested for future tax-free growth and disbursed to the charity over time.
• Charitable lead trusts. A charitable lead trust is an irrevocable trust designed to provide financial support to one or more charities for a set term – such as one or more person’s lifetime – and payments go to the designated charitable beneficiaries. After the term ends, any remaining assets can be distributed to non-charitable beneficiaries such as family members.
• Charitable remainder trusts. A charitable remainder trust provides a stream of income to designated family members for a specified term, after which the remaining assets are transferred to one or more charitable organizations. This vehicle allows someone to contribute to the trust and be eligible for a partial tax deduction, based on the amount of assets that will pass to charitable beneficiaries.

Each vehicle has different advantages and limitations that are best discussed with a financial advisor in the context of an overall financial plan. An advisor can also help identify related opportunities to increase charitable impact. For example, if an employer offers a matching gift program, it might be able to contribute directly to a charitable trust or donor-advised fund.

Benefits of donating non-cash assets

Another beneficial option is to transfer non-cash assets to charitable organizations. Examples include:

• Portfolio assets. Publicly traded securities held for more than one year – such as stocks, exchange-traded funds (ETFs), and mutual funds – are the non-cash assets most frequently donated and easily transferred to charities.
• Equity compensation. If your portfolio includes stock options, restricted stock units, or other equity compensation from an employer, gifting those assets is often more tax-advantageous than donating cash. However, this type of asset must be vested – meaning you fully own the asset – before donation.
• Privately owned business assets. If you own a business, gifting part or all of your interest to charity could yield hefty tax benefits. For example, you can avoid paying capital gains tax that otherwise would be incurred if you sold that portion of your business and donated the proceeds.
• Physical assets. You can work with a charity and your advisor on planned donations of commercial or residential property, undeveloped land, vehicles, and other valuable possessions. Again, gifting such assets directly instead of first turning them into cash will often help reduce your tax burden.

Maximize your charitable impact while mitigating your tax exposure

Donating non-cash assets may help you achieve maximum impact with your charitable giving. First, you potentially eliminate the capital gains tax you would incur if you sold the interest yourself, which may increase the amount available for charity. Second, you may claim a fair market value deduction for the tax year in which the gift is made and choose to pass on that savings in the form of more giving.

10 things to look for in a charitable organization

To help ensure you’re supporting an organization that is reputable, ethical, and responsibly managed, consider the following questions:

• Does this organization have a good reputation?
• How does the organization measure its success?
• Has that measure of success changed over time?
• Is the organization’s financial information transparent and recent?
• Can you access third-party audit information from this charity?
• Does the charity have many funders or only a handful?
• What is the main source of its funding?
• Has the organization experienced significant turnover among key staff members?
• How many people serve on the Board of Directors and are they business or community leaders?
• Are its key leaders available for you to speak with?

Most, if not all, of this information should be readily available on the organization’s website or from independent ratings sources such as GuideStar and Charity Navigator.

What do charities need most from you?

To help maximize your impact, contact your favorite charities for specific guidance. Rather than directing contributions toward a specific program, consider giving unrestricted support. Unrestricted dollars allow charities to be nimble, especially in times of crisis. Another way to multiply your impact is by acting as an ambassador for a charity among your family, friends, co-workers, and on social media.

Putting the pieces together

Although the options available to people interested in charitable giving are practically limitless, they don’t have to be overwhelming. There are three foundational steps you can take:

• Create a financial plan. As you move through this process of discovery with an advisor, discuss where philanthropy fits alongside your other values as well as your overall short- and long-term wealth management goals. That perspective will help clarify and prioritize how you want to support the causes you care about most.
• Develop and refine your tax strategy. This should be an integral part of any comprehensive financial plan. By working with a qualified financial advisor or tax specialist to understand how different charitable giving actions could influence your tax situation, you can often achieve savings that allow you to donate even more.
• Keep your estate plan up to date. Considering how you want to carry on your charitable impact beyond your lifetime can reveal vast new opportunities to benefit your valued causes as well as family members. Be sure to revisit the plan regularly and adjust for tax law changes along with your evolving goals.

Want to make a bigger impact in your charitable giving? Read about the benefits of charitable giving, uncover strategies to match your long-term goals, or speak with your wealth advisor. If you are not a Mercer Advisors client and want to learn more, let’s talk.

¹ Indiana University Indianapolis. “Giving USA: U.S. charitable giving totaled $557.16 billion in 2023.” Lilly Family School of Philanthropy, 25 June 2024.