Philanthropic giving – a useful tool in wealth management

Charitable donations no longer need to be viewed as separate from the donors’ overall wealth management. With shrewd planning, donors can enhance their philanthropy while improving their own financial wellbeing. Specifically, donors can utilize re-emerging lead and donor-advised trusts to make successive gifts to charities and their children with minimal tax consequences.

Sean Stannard-Stockton, Children need not be taxing, FT.com, Oct. 26. 2007, reports:

[A]stute philanthropic planning can help minimise or avoid gift and estate taxes, and allow parents to pass assets on to their children during life in a tax-efficient way.

A lead trust allows a donor to put assets into trust and promises to make gifts from the trust to charity for a number of years. At the end of the trust term, the donor’s children receive the remaining principal. The longer the trust and the higher the percentage given to charity, the lower the gift tax due on the transfer to the children.

Families can use these trusts to make large gifts to their children while they are still young. A trust set up on a child’s fifth birthday could be designed to transfer $1m or more on the child’s 25th birthday – free of tax. * * *

One technique is to make the annual gifts to a donor-advised fund, a “charitable checking account” from which the donor can direct gifts to non-profit organisations of their choice. This set-up works well if the parents want to involve their children in the philanthropic process. Research shows that children involved with their parents’ philanthropy from a young age handle money more responsibly. * * *

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.