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Ecology of Money

7 Tips for Better Charitable Giving

Contributor John Wasik outlines some steps on building a thoughtful plan for giving to charity.

For most people, giving to charities is a pretty simple matter: Write a check or donate cash, goods, other assets, or time.

Nearly $400 billion was donated by Americans to various causes in 2016, representing nearly 2% of the U.S. gross domestic product, according to Charity Navigator. And those donations came through a variety of ways, ranging from personal checks to distributions from sophisticated trusts.

Crafting a long-term charitable or philanthropic plan requires careful consideration--and may involve family members. You may need to work with a team of professionals to develop the right giving strategies that take into consideration estate, tax and portfolio-related matters.

Here are some steps to take to ensure your money is donated wisely.

Outline Goals
Some donors want to leave large, one-time gifts to colleges, hospitals, or other institutions, while others prefer to break up their donations among multiple causes over time. Andrew Crowell, vice chairman of D.A. Davidson & Co.'s Individual Investor Group, says families or couples should begin with a "goals analysis" with their financial advisors about their charitable strategy.

"Start with a basic financial plan," advises Crowell. "You can work with a financial planner or fee-based advisor."

Writing down charitable priorities is a good start. Which charities or institutions top your list? Of those, which have the most immediate need? Where can a donation do the most good?

Pick Causes Carefully
Some charities are better than others in directing donations to their mission. For example, some charities may be spending excessive amounts of donor funds on marketing and administrative expenses. That's why it's important to carefully vet each charity, to see what percentage of donations actually goes to their intended "program."

Key resources to do this research include Guidestar and the Better Business Bureau's Wise Giving Alliance. You can do much of the research yourself, or direct advisors to do a deep dive on how the charities spend their money.

Determine the 'When' 
Many families choose to leave some of their estate to specific causes after they die. Do you want to donate while you're still alive? If so, how might that impact your retirement income? Are you interested in making ongoing contributions over time, or gifting lump sums? It's best to have a preliminary discussion with partners, spouses, and family members about these distribution and timing related issues before you consult with outside experts.

Work with Financial Professionals 
While you don't necessarily need a financial advisor at first to establish your charitable goals, you'll want to enlist one after you have made some directional decisions about your charitable-giving strategy.

An advisor can help answer these questions: How will your donations impact your estate and heirs? Do you need a tax break (from donations) during your lifetime? What kinds of donations will you make, i.e., cash, stocks, bonds or tangible assets, such as artwork or other collectibles?

If you aren't already working with a financial advisor and need to enlist one, find a fee-only certified financial planner who has done estate planning work. Search for financial planners at the National Association of Personal Financial Advisors site.

"Starting with a financial planner makes a ton of sense," notes Crowell. "Charitable giving should be part of a comprehensive estate planning process."

A certified public accountant can consult on charitable giving-related tax matters, and an estate-planning or elder law attorney can draw up legal documents. Find a CPA using this site, and elder law attorneys here.

Determine the Best Donation Vehicles
This is where charitable planning can get complicated. There are any number of ways to donate, depending on when you want to give and how.

For example, charitable vehicles such as charitable lead or remainder trusts will dole out money to the charity or charities of your choice at a certain time, allowing you control over your money. Set up trusts that provide retirement income, and donate the remaining assets to specific groups upon the death of the surviving spouse. An estate planning attorney can work with your financial advisor to draft any necessary documents and ensure your wishes are executed in a legally sound manner.

Consider Alternative Donation Strategies
In addition to direct donations, entrust a mutual fund company to pool your money with other investors' funds for charitable causes. Such "donor-advised funds" let your money grow under professional management. They are an "all-in-one solution" that can be a reasonably low cost (pay an annual management fee), and you can usually direct donations at your discretion as long as your selected recipient is an eligible charity. Make contributions, receive immediate tax deductions, and direct money ("grants") to specific charities over time. Any money that’s not donated is invested and grows tax free.

Many mutual fund and money management firms offers donor-advised funds. Just be careful when considering a donor-advised fund. Once you invest in them, you can't take your money out--donations are considered irrevocable--and you are locked into a specific investment management firm. You are also restricted to granting money to registered 501(c)(3) nonprofits.

It's also possible to set up a family or private foundation, although this option entails much greater expense, time, management, and paperwork. For most middle-class families, donor-advised funds are a relatively low-cost, turnkey vehicle: Annual management expenses average about 0.85% for a donor-advised fund compared with up to 4% a year for a foundation, according to the National Philanthropic Trust.

Understand the Tax Implications 
For this part, work with tax and financial advisors. For example, if you donate cash to a donor-advised fund, you'll generally receive a 50% tax deduction; 30% for appreciated assets like a stock.

Of course, the value of a tax deduction depends upon your family's income, assets and other factors. A natural question for your advisors is "how much of a tax break do we need?" It also matters which kind of organization you are supporting. Most nonprofits are registered as 501(c)(3) nonprofit corporations, which allow you to deduct donations. But there are also nonprofits that are called 501(c)(4) corporations, which do political lobbying; contributions to these entities are not tax deductible.

No matter which charitable planning strategy you adopt, be patient with the process. It may take more than a year to craft and execute the best strategy for you and your family, and you may want to revise it over time. In the end, you'll not only create a satisfying charitable plan, but discover how your values--and money--can help others.

Other Charitable Planning Resources

Charity Navigator rates more than 8,000 charities and it a good first stop for vetting charities, along with BBB and Guidestar mentioned above.

Charity Watch also rates charities, but is more of a watchdog on nonprofit abuses.

GiveWell doesn't rate as many charities as the other services listed here, but it provides in-depth analysis on a select group of nonprofits.

John F. Wasik is a freelance columnist for Morningstar.com and author of 16 books, including Lightning Strikes: Timeless Lessons in Creativity from the Life and Work of Nikola Tesla. The views expressed in this article do not necessarily reflect the views of Morningstar.com.