Donating to charity is one of the most personal decisions you can make. When you add that to your personal finances, it can be even more complex. EP Wealth Advisors® can incorporate charitable giving into your financial plan so you can make your impact and plan for your future.
Studies show that, for some, donating money to charity can increase happiness and personal satisfaction. There can be empowerment in feeling like you are making a difference, especially if you choose a charity that engages your moral compass.
People donate to charity for two main reasons. The first is altruism, meaning that you are donating because you value the social impact your wealth could have and you want to make a difference. The second reason is personal, meaning you value the impact donating to charity can have on your life in the form of potential tax benefits and/or social prestige. In reality, people may donate their money to charity for both of those reasons, although one may be more influential than the other. Recognizing why you want to donate your money to charity is the first step in knowing how to donate effectively. For example, if you are donating to a cancer research non-profit because of the suffering of a close family member, you may reap positive psychological benefits. Other factors may also influence this decision, but not as much as making a difference to a cause that has affected someone close to you. Whether you are donating altruistically or personally, the effects are generally for the positive.
Philanthropy can be an effective tool for sparking conversations about financial literacy within your family. Charitable donations can be used to explain the importance of generosity, allowing you to lead by example and inspire youth to become more invested in understanding their finances.
Choosing where to donate your money is one of the most important steps you can take to maximize the effectiveness of your philanthropy. Before donating to charity, begin by clarifying your values and preferences so you have an understanding of your philanthropic goals and the amount you can contribute based on your financial plan.
When you have a general understanding of how you want to direct your philanthropy, then it is time to research the charities that appeal to you. It is important to ask yourself some questions.
Exercising due diligence is essential to ensure you are directing your money efficiently. Check a variety of resources that evaluate the legitimacy of the charity. You will need to make sure that their financial goals are transparent and in line with your philanthropic goals. A reputable charity will have a clear mission supported by its programs with measurable goals and achievements. Once you have used your online resources to narrow the field, it is worthwhile to visit and/or speak with a representative and use that opportunity to interview them. Follow your instincts; if a charity makes you uncomfortable, there may be a better option for you.
Evaluate how the charity handles donor relationships. They should want to empower you and seek to maximize the specific impact of your donations on the goals and programs they provide. This will help maximize the altruistic and personal effects donating to charity has on your life.
These resources can help you evaluate and select charities suited to your goals:
Every person has a unique financial situation. Everyone also has a unique set of core values that contribute to their philanthropic goals. Consequently, the best way to donate varies from individual to individual, and a variety of donation strategies are available to accomplish this.
Cash or personal goods is usually how people donate to charitable organizations, but depending on your specific circumstances this may not be the most efficient or effective method of donating. Other options are available, like several types of trusts and charitable giving funds can be formed specifically for this purpose. Subsequently a variety of donation strategies can be deployed based on the needs of the individual. Donating appreciated stock or securities can be an option because it allows the charity to sell the stock tax free. The same general principle applies to other complex assets that can appreciate, such as real estate and other non-typical assets.
What kinds of trusts and charitable giving funds are most commonly considered for these purposes? Here are three you’re likely to encounter:
A donor advised fund (DAF) is different from trusts in that you can donate assets and take advantage of the tax deductions without specifying the charitable organization(s) that will eventually receive the funds at the time of inception. This allows you freedom to choose your charitable donation recipients over time.
A charitable remainder trust (CRT) is formed when assets are transferred irrevocably into a fund. This trust fund should generate income which you or the stated beneficiary receives for the specified lifetime of the trust. At the end of the specified term, the remaining trust assets are distributed to one or more charities chosen at the formation of the CRT. You may consider naming a donor advised fund to maintain flexibility in who the underlying assets go to.
A charitable lead trust (CLT) is the opposite of a charitable remainder trust. Assets are transferred irrevocably into a fund where one or more charities receive the generated income for the lifetime of the trust. At the end of the specified term, the remaining assets are distributed to a designated beneficiary.
EP Wealth Advisors has experience assisting clients with a wide range of charitable objectives. We can help you incorporate charitable giving into your financial plan with considerations to tax efficiency based on your individual needs and philanthropic goals. Our guidance can maximize your charitable contributions and your tax deductions, providing peace of mind for both the future of your retirement and your philanthropy. If you would like to explore your options, we invite you contact us.
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