Time to take a hard-nosed look at giving

By Sean Stannard-Stockton

Published January 5, 2008|Available on FT.com

Every end is a new beginning. Having said goodbye to 2007, now is the time to look forward to 2008 and decide what kind of philanthropist you want to be. Are you satisfied being part of the majority of Americans who rush to fulfil their philanthropic obligations in a flurry of year-end giving? Or will this be the year that you get organised and maximise the impact of your philanthropic capital?

Recently, the Financial Times reported on the growing ranks of “hard-nosed philanthropists”. These donors are “part of a new breed of wealthy charitable donors: strategic philanthropists, passionate about their causes, who want to ensure their philanthropic dollars have the greatest return – and impact – possible”.

How can you become a hard-nosed philanthropist in 2008? The first thing to do is to create a philanthropic vehicle so you can separate the tax implications of your giving from your altruistic motivation. When you fund a philanthropic vehicle such as a private foundation or a donor-advised fund (a kind of “charitable checking account” similar to a private foundation), you receive a tax deduction at the time the money goes into the account. This means you can move money into your philanthropic account on the timeline that fits your tax situation while making gifts to non-profit organisations when it fits your charitable goals. An amazing 50 per cent of all charitable donations are made between Thanksgiving and the new year. By setting up a philanthropic vehicle, you will free yourself from the year-end scramble and maximise the tax benefits of your giving.

Most people simply write cheques to the non-profit organisations that they support. But hard-nosed philanthropists know the first rule of tax-smart giving: always give with your most highly appreciated assets. When you write a cheque, you get an income tax deduction for the value of your donation. When you make a gift of an appreciated asset (such as a stock that has risen in value), you get both an income tax deduction for the full value of the asset and avoid paying capital gains tax on the appreciation.

Unfortunately, if you make multiple donations each year, it can be cumbersome to re-evaluate your asset base to identify your most highly appreciated assets and then complete a transfer to each non-profit you support. By setting up a philanthropic vehicle, you can work with your financial advisers to identify the best assets to use for your giving and transfer them in a single transaction to your philanthropic account.

Your two main choices for a philanthropic vehicle are a private foundation or a donor-advised fund. A donor-advised fund generally makes sense if you give $500 or more to charity each year. A private foundation may be cost effective if you give at least $25,000. Beyond cost considerations, choosing between the two rests on the way you like to give, the type of appreciated assets you plan to give, and the level of your family’s involvement.

Foundations have more flexibility to let you do things such as lend money to non-profit organisations, give internationally or “invest” in philanthropic projects. However, only gifts of cash or common stock to a foundation qualify for a full market value income tax deduction. A donor-advised fund is more tax efficient for donors whose most highly appreciated assets include items other than stocks.

Finally, while a family can be involved in the decision-making process of which non-profits to support from a donor-advised fund, only a private foundation allows for the creation of an official board that family members can join.

Most donors have never taken a “hard-nosed” look at how much they can afford to give. From a tax standpoint, it makes sense to move as much of your total planned lifetime giving into a philanthropic account as you feel comfortable committing to. The benefits of this strategy include realising tax deductions sooner and allowing your assets to increase in the tax-advantaged philanthropic account.

One good resource is Wealthy and Wise by Claude Rosenberg. In this book, Rosenberg gives statistical models that demonstrate most people can afford to give far more to charity without unduly risking their financial security. Another source for donors is a group called Bolder Giving. Founded by Anne and Christopher Ellinger, authors of We Gave Away a Fortune, Bolder Giving seeks to help donors give at their full potential.

This year, make your new year’s resolution a decision to become a hard-nosed philanthropist. Next December, when others are breathlessly writing cheques before the tax year ends, the hard-nosed look you took at your giving earlier in the year will be paying off.

The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog TacticalPhilanthropy.com