How to make your charitable planning more strategic

Susan wants to donate money to an urban tennis program making a difference for young people, but she isn’t sure how much she can give without compromising other goals. Belinda gives a lot of time and money to an organization that provides emergency housing to families, but she suspects that writing checks isn’t the most efficient way to give. Many people in similar situations could benefit from these four steps to charitable planning.

1. Decide whether to give

People have many different goals for their money, and all those goals are valid. So don’t feel that a charitable giving plan is a requirement.

You might prioritize other goals, like gifting to family. You might prefer to contribute by volunteering your time and talent, rather than making charitable donations.

If charitable giving is meaningful to you and part of your money story, then proceed to step 2.

2. Decide how much to give

I often encourage people who feel an urge to make charitable contributions to just start doing so, even in small amounts. You don’t need to wait until you have a full plan. If a small gift feels right, you can make another gift or a bigger one. It opens the gates, and the journey will unfold on its own.

My husband and I started by giving 2% of our net income, then raised it to 5% when we felt we had enough money to do, and so on. Over time, you can build a strategy.

Many people base their decision on a religious or cultural tradition:

• The Christian tithing tradition calls for giving 10% of your income, but there is room for interpretation. Is it 10% of gross or net income? Does that 10% cover all charitable giving or just church-related giving?
• The Jewish tzedakahtradition has four stages of giving, with the middle “good” and “better” levels being 10% and 20% of net income.
• Under the Zakat pillar of Islam, Muslims give 2.5% of their wealth. This can include gifts to public charities but also informal giving to individuals in need.

Some people with a high net worth have moved to giving 1% of their assets each year if that figure is higher than 10% of their income.

3. Decide who to give to

We find that people usually start by giving to charitable organizations they know personally or that address causes that matter to them.

This can start at a young age, and you can foster it in your children and grandchildren. A former colleague gives her children a spend/save/give allowance. At the end of the year, each child chooses what organization will get their “give” portion.

A bonus to this process is that it shines a light on what is important to each child. She has one child who always chooses an animal-related organization and one who gives to organizations that help people who are homeless.

I personally love to follow the energy. If I see that someone is energized about a particular opportunity, I follow their passion with a charitable gift. For example, I have given to a charity for orphans in China because a colleague was passionate about it.

Clients often ask how to vet charities. There are websites, like Charity Navigator, that rate charities on their financial health and transparency. We recommend using this kind of resource as part of your decision process.

However, a charity you are passionate about or personally involved in might have a valid reason for high overhead or other things that lower its score. We are called to different things so we can collectively get a lot done. I believe that following what moves you is more important than the metrics.

4. Decide when and how to give

Becoming more intentional about charitable planning has tax benefits and can be helpful for budgeting and negotiating with a partner.

Donor-Advised Funds (DAF) and the inclusion of charitable giving in estate planning are two common vehicles. Others include charitable reminder trusts, charitable lead trusts, private foundations, and donating out of a retirement account.

Donor-Advised Funds

DAFs offer triple tax savings: lower capital gains taxes if donating appreciated investments instead of cash, potentially higher income tax deduction, and assets that grow tax-free. Most people add to their DAF every three to five years to maximize the tax savings and take advantage of market swings.

Because of investment growth, we’ve seen clients whose DAF balance is as high now as when they opened it even though they’ve been donating out of it.

A DAF also gives you a dedicated bucket to donate from. But even if you don’t use a DAF, it’s a good idea to earmark money somehow for charitable giving, like a separate bank account. With earmarked money, you and your partner can negotiate once a year how much you are going to give to charity. Then you both donate out of that fund or account as opportunities arise, rather than each transaction being a negotiation.

People who want their adult children to continue in their philanthropic footsteps sometimes create a DAF for them and fund that rather than giving them cash gifts.

Charitable giving in estate planning

Legacy giving is a good solution when one partner wants to give but the other worries it will leave them short in other areas. Many people also have a legacy giving plan on top of giving during their lifetime.

The easiest and most common way to accomplish legacy giving is to make a charity or DAF a beneficiary of your retirement accounts. Those donated proceeds are not subject to tax, which can save 30 to 50 cents on the dollar. You can also make the charity or DAF the contingent beneficiary, after your partner.