Hints for high rollers
If you are lucky enough to have substantial assets or, better yet, the prospect of generating them in the future, make sure to read this little aside. Note that I am not a financial professional and am in no way qualified to give you financial advice. If you like what you read, consult a professional to see if it applies to you.
Most large purses do not fill up steadily. Entrepreneurs hit pay dirt when a company's stock pops. Authors make a pile when the great American novel turns out really to be one. Real estate investors realize big gains when they sell an appreciated property. A little known wrinkle in Jewish law is what to do with a windfall. Most people know about tithing, giving 10% to charity. But some sources recommend giving 20% of a windfall! (The Talmud specifies a maximum gift of 20%, probably the source of this advice.) We all have our own ways of calculating these numbers and that's fine but here's the important advice: Don't wait too long! If, for example, your company hits the big time and suddenly you are worth a million dollars, you will want to sell some of that stock and invest it in a diversified portfolio to protect yourself and your family from a future stock market reversal. And in gratitude for your good fortune, you will want make gifts to some good causes. But if you sell the stock and then make gifts, you pay capital gains tax on the full amount, reducing both the size of your nest egg and what you have left for charity. So donate the stock directly, without selling it first. Your tax deduction is based on the current value of the stock and when you do pay tax on the stock you sell for yourself, you will not be paying tax on shares you donated previously. It's a great deal. If you acquired shares at various prices, donate those that cost the least, thereby bypassing tax on the largest gain.
But what if you want to make one donation of appreciated assets and have it benefit many causes? It is awkward to donate bits of stock to many recipient organizations. Or what if some of your causes don't really need the money right now? Maybe you want to support a future building campaign. What if an organization comes after you every year for another gift (they do) and you would like to reserve money now for that future giving? What if you don't know a lot yet about worthy charitable causes but hope to learn more in the future? If you sell your stock, pay the taxes and save the money until ready to donate, then you have to pay tax now at a high rate. When you get around to donating the money, your income in that year may be much lower and you may not be able to take full advantage of the charitable gift deduction because those deductions are limited by current year income.
So how do you prepare for future generosity when you have a windfall? It's easy. It's a financial tool called a "donor advised fund." You set it up like a brokerage account and contribute to it when you have extra. In a windfall year, you are going to incur a big tax liability, so the deduction is more likely to be fully usable. Most funds will accept appreciated assets like stocks and some will accept things like real estate, vehicles and collectibles. Of course, you can also donate cash. Some writers and lawyers, for example, have highly variable cash income and don't want their charitable giving to suffer the same fluctuations. The fund liquidates the non-cash assets and invests everything in a limited selection of securities - stocks, bonds, mutual funds and the like - that can appreciate while waiting for you to decide what to give to whom, when. The money no longer belongs to you but you can impact how it grows (or shrinks - be careful!) and how it is distributed eventually to worthy causes. Different funds have different rules but most give the donor some control over the investments. Most major investment companies such as Fidelity and Schwab offer donor-advised funds. So do the Truckee Tahoe Community Foundation and Jewish Silicon Valley. Check them out.
When you want to make a grant to a specific charity, you recommend to the fund how much to send and where to send it. They research the recipient if it is one they do not yet know and, if it meets specified criteria, they send a check. The criteria may be as broad as "any 501(c)3 tax-exempt organization." Turnaround is usually a few days but smaller funds may approve grants only periodically. (They can also refuse a recommendation that they deem to be counter to their rules or their mission. Check these out before enrolling in a fund.) You get no tax benefit when they make the grant. You got that when you transferred your assets to the fund. You are effectively decoupling the tax-deductible events from the gifts to charities so that they all happen at times that work for you.
You pay the fund a fee for this service, typically a percent or so annually depending on how much you have on deposit in the fund. You could avoid this by setting up a private, charitable foundation that you manage completely by yourself. Although the tax impact is similar, the burden on you is greater. A foundation is a tax entity so you have to file tax returns for it every year. Also, there are rules governing how rapidly you must disburse the money to charity. You may need to hire legal or financial assistance. Unless you intend to donate millions of dollars, this probably will not work out for you.
So keep this strategy in mind if you expect to make large or even mid-sized gifts to charity: Give appreciated assets to avoid paying capital gains tax and use a donor-advised fund to decouple the timing of your donations from your gifts so that both happen when you want them to happen.