People give to charities in a variety of ways. Some donate belongings they no longer need. Others cut a check from time to time. Still others give regularly each year. The methods are varied, but understanding the options can save you time, money, and maybe even a few headaches along the way.

Learning more about investment philosophies and keeping up on changes to the tax code can help ensure that the charitable organizations you support are taken care of now and in the future. You may even be able to increase your own cash flow at the same time.

Experts say the economic crisis and shaky outlook for traditional investments do not have to dampen enthusiasm for planned giving, and, in fact, some say this is an ideal time to take advantage of creative planned giving options.

The most traditional form of philanthropy through estate planning is making bequests or dispositions in a will, says Dinsmore & Shohl attorney Michael Cooney.

This type of giving has increased as a result of charitable organizations’ marketing efforts, says Mark Brackney, a gift-planning officer with the Cincinnati Area Chapter of the American Red Cross.

Although donating through a bequest or will can be simple, Cooney advises it’s prudent to revisit your estate plans and wills every five years because both financial and family situations can change.

Also, while you might expect planned giving in a will to create more work for the executor, Cooney insists that simply isn’t so. Adding beneficiaries, however, can make the process more complicated.

Another thing to keep in mind is that if your estate planning is through a will, it doesn’t matter to whom you leave your assets: It will have to go through probate court.

“Ohio has, what I would call, a more formidable probate process. Assets that are subject to probate are administered by the executor under supervision of the probate court,” Cooney says. That means a lot of reporting to the court. It’s a very detailed process, not to mention a very public process. In Hamilton County, for example, the records are available online. Just across the river in Kentucky, however, the process is much less formal and much less burdensome.


Over the years, financial planners and charitable organizations have come up with new ways to satisfy philanthropic commitments, and many options are simply not available through a will.

One of the most common is through joint property, Cooney observes, such as a joint bank account, that passes on to a surviving spouse. But the most recommended means of avoiding probate and bequeathing estate gifts to charitable or nonprofit organizations is through a legal trust.

“For people who are interested in avoiding probate, we can create a trust,” Cooney says. Once a trust is created, any assets added to it during an individual’s lifetime are not subject to the court process. Basically, the trust becomes a substitute for the will.

Chris White, a wealth management adviser for National City Bank in Cincinnati, says more clients are taking advantage of charitable annuity trusts, in part because they’re more attractive when interest rates are low.

A charitable lead trust makes annual payments to a designated nonprofit or charity for a designated number of years, then the trust assets transfer to designated beneficiaries, usually children or grandchildren. The annual payments can be a fixed annuity amount (called a “charitable lead annuity trust,” or CLAT) or a fixed percentage of the fair market value of the trust as it is assessed each year (a “charitable lead unitrust”).

When this kind of trust is created, it’s deemed a gift to the charity that is tax deductible, and it’s also a gift to the eventual beneficiaries that could be taxable, depending on the donor’s estate tax exemption.

A key factor is calculating the amount of the tax deduction for the charitable gift, because the Internal Revenue Service uses monthly federal interest rates (called the Section 7520 rate) to determine the value of trust payments to the charity or nonprofit. A low 7520 interest rate produces a higher charitable gift tax deduction and lowers the potential gift taxes for the estate.

“If someone has philanthropic intentions,” White explains, “they can fulfill them because the trust will provide that annuity stream on an annual basis (for) whatever amount of time is prescribed in the agreement.”

The Section 7520 rates are almost at a historic low of around 4 percent, he adds. “That happens to be a very attractive rate if your portfolio generates a return greater than (the applicable federal rate),” he points out. That means the difference between the real income and the rate goes to the remainder beneficiary. “The charity is going to get their income interest, but at the end of the day, we can transfer a certain amount of wealth back to the family or next generation ... with very little, maybe even zero, transfer taxes depending on how we structure that part of the trust.”

Leon H. Loewenstine, a managing director at Riverpoint Capital Management in Cincinnati, says charitable remainder annuity trusts, or unitrusts, are popular. “That’s a way for an individual to transfer assets to the charity, but in essence get an annuity payout, which will stream back to them for their lifetime or the lifetime of ... (a surviving) spouse.” After that, the fund goes to the charity, giving the individual or surviving spouse an immediate tax deduction and allowing him or her to avoid taxes on the security transfer to the charity trust. At that time, he or she also can sell the securities to avoid the capital gains taxes and take a payout from the trust over a lifetime.

“Generally, that payout has to be a minimum of 5 percent, and that depends on whether it is ... a charitable remainder unitrust, or a charitable remainder annuity trust,” Loewenstine continues. The type of trust used is determined by what the donor is comfortable with in regard to the return. It can either be 5 percent fixed up front or 5 percent of the market value of those assets in that trust at any given point in time.

“Some people think the assets (will) go up in value, and they’ll want a 5 percent payout at the market value because their payout will go up annually,” Loewenstine notes. However, it could go down in certain years, and some people would prefer a guaranteed sum.


A charitable remainder trust can also increase your current cash flow now, White says. “Let’s say you have appreciated securities that aren’t paying much in the way of dividends income, but you don’t want to incur the capital tax (if you sell them). If you have charitable inclinations, you can put those securities into a charitable remainder trust, or unitrust, and that will pay income out ... over the term of that trust. It could be life or for a term of up to 20 years.” In that way, the trust is a tax-exempt annuity. As the trust sells shares, there is no capital gains tax on those sales. The trust can then reinvest the depreciated, non-income-producing assets into something that does generate income.

A charitable gift annuity can also positively affect your cash flow. “In a charitable gift annuity, you, the donor, give a large sum of money to the charity. The charity then acts as a sort of trustee, and they are on the hook to pay you an annuity stream for however long you may live.” If you live to be 150, that charity has to keep paying you, but if you die next year, it only has to make that one annual payment, and it gets to keep the principal.

A pooled-income fund is another way donors can help nonprofit organizations or charities while also generating cash flow for themselves. “It’s a kind of mutual fund that’s run by the charity,” White explains. “So the amount that you would receive by making a donation to the pooled income fund is going to vary every year based on the money manager’s performance. In a year like this, where interest rates are rather low, the amount you may receive out of the pooled income fund may be lower than it was last year, or a few years ago.”

However, you receive the income stream for the rest of your life; when you die, the charity receives the principal.

Although not very common, some institutions, particularly colleges and universities, are benefiting from a planned-giving option called retained life estates. The donor deeds a personal residence or farm to the nonprofit recipient but can continue to reside there for his or her lifetime (or a specified term) and can take an immediate income tax deduction for a portion of the appraised value. The donor pays for the appraisal (but can deduct part of that expense) and remains responsible for property taxes and upkeep. When the term ends, usually upon the death of the donor, the recipient charity or nonprofit may sell the donated property.


There are many other vehicles for planned giving, each with advantages for both the benefactor and the recipient. One gaining in popularity, according to White, is the donor advisement fund. “These are usually run by large organizations, and they are meant to replicate a family foundation,” he explains.

In a traditional family foundation, an attorney must draw up the documentation, which can be costly. Also, family foundations must file with the IRS each year as private foundations.

If the funding amount isn’t that large, or the donor doesn’t want to deal with all the formalities and expenses associated with family foundations, then the donor advisement fund might be a good choice, White says. As with a family foundation, the donor can still take a deduction at fair market value. Also, instead of having to hire an attorney, there are several institutions — such as the Greater Cincinnati Foundation and some large mutual fund houses — that can set up a donor advisement fund.

A similar plan is the donor-managed investment account. In this option, a donor establishes a specific fund within a charitable organization, which then affords the donor the opportunity to retain management privileges.

Still, some donors opt for the private or family foundation route, Loewenstine says, especially if they have funding in the million-dollar range.

Setting up your own private or family foundation may allow you to carry on your name for a longer amount of time, and it gives you more control of the day-to-day operation of the foundation. You can determine to whom and when you’re going to distribute funds, and you’ll have more flexibility in terms of family involvement.

“You can have annual meetings with your family, making it a good way to keep them together and charity-oriented,” Loewenstine says. It’s a good way to pass down the value and tradition of giving. “If I give the money to a donor advisement fund, I don’t really have any control. I can’t pay for expenses (such as) a meeting or something we need to do, and it’s a little harder. Not saying it can’t be done. It’s just harder to keep the family involved and together.”

Unlike a donor advisement fund, though, a foundation must give away 5 percent of its assets a year; for example, $5,000 a year if the foundation has $100,000.

You don’t necessarily have to have a private foundation or a donor advisement fund to designate where you give your money. Many organizations, including the Red Cross, will allow donors to direct where they want their funds to go.

“We always encourage donors to designate their gifts,” Brackney says. “Even with a gift we receive during a hurricane, we always encourage donors to designate their gift, so that we know they want it to be used for disaster relief, or general operating purposes.”

It’s also becoming increasingly important for donors to designate the gift, Brackney adds, because many national organizations now require chapters to share bequests and planned gifts with a parent organization. This happens if there is no clear indication that the gift is for the local chapter.

“If a donor leaves a bequest to the American Red Cross,” Brackney explains, “and the chapter receives word of it, then we split that donation 50-50 with the national organization.”

Arrangements can be made in concert with the donor, the financial planner, or both. “We can work as closely with a donor and their advisers as they want,” Brackney says. “I think in most cases it would be the donor who decides at what level (to give).”

The Red Cross, for its part, receives a variety of gifts from donors: “money, property, life insurance, IRAs, retirement plans, various types of investments, stocks, bonds, mutual funds,” Brackney says. “It’s really what works best for the donor. It should be satisfying to the donor such that it meets the goals for themselves and for the organization.”

When considering planned giving, make sure to take into account the instances when annual charitable giving could affect your adjusted gross income, White advises. “That would involve using an arrangement that might not be tax-exempt,” he says. “Like a charitable remainder trust ... a tax-exempt entity. A charitable lead annuity trust, oddly enough, is not. The contributions that are made to a charitable remainder trust are a tax deduction. Even though it doesn’t affect adjusted gross income, it will affect taxable income.”

Of course, you should be planning ahead as the year winds down. Consider using appreciated securities, not cash, to satisfy charitable pledges, White says. “Donate the stock as opposed to cutting a check. This way, you not only avoid the capital gains tax, you can take a deduction at fair market value.”

Cash gifts, however, also provide tax advantages, because they give you the ability to deduct full gifts of up to 50 percent of your income, Loewenstine notes. “If you give securities to a charity, your deduction is limited to 30 percent of your income, and if you give to a private foundation, it’s limited to 20 percent on average.” Also, capital gains are only taxed at 15 percent, while ordinary income is taxed at 28 to 31 percent.

Whatever you don’t deduct in a given year, you can carry to the next year. Advisers warn you should be careful, and figure out which year you want to give to charity from a tax position. “Generally speaking, when giving a large gift — $100,000 or $200,000 — you really want to get an accountant involved and have them run a tax projection to see what the tax benefit is and see if it makes sense to split that contribution between years,” Loewenstine adds.

In the end, what matters most, of course, is that you’ve helped an organization you believe in to further its mission. And, if you can do that while stabilizing your financial situation or saving yourself some tax liability, you can chalk it up to a win-win