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Diversification: A Strategy for Your Clients’ Investments—and Charitable Giving

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Similar to a diversified investment portfolio, many donors allocate their charitable dollars among a mix of giving tools. A diversified approach to giving can optimize tax benefits and enable strategic philanthropy that meets a variety of giving goals.

For instance, while accounts at donor-advised fund Vanguard Charitable grant regularly—with the majority of donors granting at least 5% of their balance per year—56% of Vanguard Charitable donors report that they use their account for only the majority of their giving. This suggests that they’re also donating in other ways.

Direct giving… and what else?

Nearly 87%1 of high net worth donors give cash (usually through checks or debit and credit card transactions) directly to charities, even if they use other giving tools. But direct cash giving requires the donor to obtain a written substantiation letter from each charity for tax purposes and has limited tax benefits compared to donating other types of assets.

The limitations of direct giving have led donors to use multiple giving tools, thereby enabling them to implement a philanthropic strategy that addresses different goals—whether for the short or long-term, or for specific investment, cost, distribution or legacy reasons.

Here’s a look at some of the other most commonly used giving tools.

Private foundation, donor-advised fund… or both

Traditionally, high net worth individuals tended to set up private foundations—independent charitable organizations with governing legal documents and a governing body with complete control over investment and grant-making decisions—for their charitable giving.

Private foundations enable donors to make charitable gifts for a specific mission, build a permanent legacy, keep control in the family, and of course, achieve tax benefits.

Because private foundations are subject to strict regulations, including a required 5% annual distribution of net investment assets, they are generally expensive to create and maintain. And because of public filing requirements, it is difficult to use a private foundation for anonymous giving. When assets are contributed to a private foundation, donors can deduct up to 30% of their adjusted gross income (AGI) for cash gifts and 20% for securities held more than one year.

Today, high net worth individuals are recognizing the benefits of another giving tool: donor-advised funds. Donors contribute assets to a DAF and take an immediate tax deduction. The DAF sponsoring organization becomes the legal owner of the funds, but the donor retains the right to recommend the investment options for the assets, which can grow tax-free and thus create a more substantial charitable impact over time, and to recommend grants.

DAFs provide many administrative services for donors, including a single written substantiation of charitable contributions for tax purposes, tools for performing due diligence on charities, and the ability to process contributions of appreciated securities and complex assets. When assets are contributed to a DAF, donors can deduct up to 50% of AGI for cash and 30% for securities held more than one year.

Many DAFs are also low-cost and cause-neutral, meaning donors can recommend grants to any charity that meets IRS requirements.

With greater recognition of DAFs, many private foundation managers and donors are shifting how they use the vehicles.

“We’re seeing a trend in many donors using a DAF in combination with their foundation so that they can recommend anonymous grants, invest certain assets differently, contribute different types of assets (for instance, it’s more beneficial tax-wise to contribute appreciated securities to a DAF than a private foundation), reduce the total cost of giving, and have the flexibility to grant outside the foundation’s mission. Others are choosing to close their private foundations and transfer all the assets to a DAF,” said Ann Gill, chief philanthropic officer for Vanguard Charitable.

Charitable trusts as cash flow and estate planning tools

Many donors include trusts in their charitable portfolios to obtain an income stream and estate tax benefits.

With a charitable remainder trust, a donor transfers assets to a trust and receives an annual income stream for a select individual. At the end of the trust’s lifetime, the remaining funds are transferred to a charity.

With a charitable lead trust, the order is reversed. Once assets are transferred to a trust, a chosen charity receives an annual gift for a period of time, while a family member or other beneficiary assumes the remainder in the future.

Choosing your portfolio of giving tools

For donors looking to expand their charitable portfolio with giving tools that best support their philanthropic preferences and giving goals, Vanguard Charitable suggests assessing six key factors: cost, distribution to charity, control or level of input, legacy options, tax effectiveness, and recognition vs anonymity.

Consult a tax advisor about the tax features associated with each tool.

Learn how to maximize your charitable impact at year-end by visiting

¹US Trust Study of High Net Worth Philanthropy


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