Americans make many investments in their lives, including investments in the form of donations to charity. These investments are designed to help a charity successfully make progress toward a worthy cause. Americans gave a record $308 billion to charitable causes last year, according to a report by the Giving USA Foundation at Indiana University.
What to Do Before Making a Charitable Contribution
Too often people do not do the same homework before making a charitable contribution that they do before making other investments. And as a result many people may not be taking advantage of all of the charitable options available to them.
Not all charities are alike and deciding where to donate money can be more complicated than many people think. Just consider that even an investor as savvy as Warren Buffett pledged $31 billion to the Bill and Melinda Gates Foundation because he felt they were better able to disperse the money than he was.
When considering a charitable donation, a person should look for things they care about deeply. It might be the environment, or poverty, or children, or providing help to a particular part of the world. Whatever stirs passion, there are probably multiple charities that are trying to help make things better.
Not All Charities are Alike
Different charities make a variety of decisions on how to utilize their resources. Quite frankly, some charities spend an enormous chunk of the money they take in on staff salaries and other administrative costs. Most people would prefer not to donate money to a charity that is supporting several six-figure staff salaries while supposedly helping people who are disadvantaged. Fortunately there is a web site (www.charitynavigator.org) that rates more than 5,300 non-profit charities on their financial efficiency. Check it out before signing a check.
Pension Money and Tax Consequences to Heirs
IRA investors were given more reasons to be charitable as a result of the Pension Protection Act of 2006. The act allows distributions from qualified plans to be rolled over to a charity tax free. The Indianapolis-based National Committee on Planned Giving says that distributions received by charities from individual retirement accounts have increased dramatically since the act became law.
Lastly, some people may be missing out on a big tax break that can come to them and their heirs based upon a charitable donation that is grounded in the value of one’s home. This involves the gifting of a remainder interest in a primary home. Let’s assume a retired couple living in a residence worth $1.5 million has already made ample provisions in their will for their children. Ordinarily when the couple dies, the children will sell the property and pay estate taxes on the appreciated value. But what if the couple is active in several charities and would like to make a meaningful gift to their favorite?
This situation is ideally suited to gifting a residential remainder interest in the home. The couple can continue living in their home while removing its appreciated value from their estate. They receive a substantial deduction on current taxes, make a significant charitable gift and ease wealth transfer to their heirs. This can be a complicated arrangement with many permutations, so it is best discussed with a financial adviser. But it is a charitable step that can help one now and help one’s heirs later.