Charitable giving is a meaningful way to make a difference and care for our communities. For me, it’s a way to say thank you to the many organizations that have helped shape my life. Overall, charitable giving helps create a more equitable future and positively influence the world we want to live in.
As a financial advisor, it has been gratifying to see how starting a significant relationship with charitable giving has changed the way clients have viewed their own money and financial success. I’ve had clients who may not have previously donated much on a year-to-year basis, but with a bit of financial planning were able to create charitable giving budgets for themselves. For many of these folks, it wasn’t until they started giving their money away that they realized they truly had “enough.”
In short, the act of giving invited a sense of peacefulness in their personal finances – confirming a feeling of true financial security as a result of their acts of generosity. A primary purpose of my work as an advisor is helping clients achieve a sense of financial security. In this sense, giving can be truly transformative in nature for both the giver and receiver.
While there are many ways to get involved in your community and help others, your charitable giving can often be more impactful when thoughtfully planned out ahead of time. Called a “charitable giving strategy,” this method can help you incorporate philanthropy into your broader financial plan to amplify your impact.
Here are 9 steps to craft a charitable giving strategy of your own.
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1. Self-Assessment and Goal Setting
The first step in building your own charitable giving strategy is to think about who you are and what kind of impact you want to make on the world. Start by reflecting on your philanthropic values. These might be based on spiritual beliefs, personal experiences, or challenges you’ve seen others face within your community.
Consider also what you’re passionate about. If you’re an avid animal lover, wildlife conservation could be a natural fit. Or, if you’ve always had an interest in helping young people, focusing your efforts on mentorship or youth support programs would make sense.
Using your philanthropic values and areas of interest, create your own set of giving goals and objectives. This could be a dollar amount, but it can also extend beyond that – especially if you plan on becoming personally involved in the charity of your choice. You could set a goal to host a charity fundraiser, expand your charity’s network of donors, or establish a future stream of income for your desired organization.
2. Determine Your Giving Allocation
If you’re wanting to be more mindful about giving generously to others, it can help to prioritize your giving strategy within your financial plan. Without a strategy, it can be easy for your giving wishes to shift to the back burner.
Working with your financial advisor, evaluate your capacity for charitable giving. Maybe it’s an annual lump-sum contribution, monthly gifting, or another frequency that makes sense for you and your charity of choice. However much you’re aiming to give, make sure it aligns with your income and financial goals. As important as charitable giving is, it shouldn’t impede your ability to save for retirement, pay down debt, and meet your other financial obligations.
As you determine your giving allocation, consider how you’d like your funds allocated. Maybe your favorite charity hosts an annual golf tournament and you’d like to donate to the event. Or, you’d prefer to give more to specific organizations during the holiday season. You’ll want to account for these preferences when building your charitable giving strategy each year.
3. Research Charitable Organizations
While the majority of charitable organizations are interested in doing good, it’s still important to conduct your due diligence before donating.
As you build a charitable giving strategy, use research to identify reputable and impactful charities. You can use third-party charity trackers such as Charity Navigator or Charity Watch. These organizations rate charities on transparency, effectiveness, financial fidelity, and donor ratings.
Researching charities is especially important if the organization isn’t local or you haven’t worked with them before. Unfortunately, bad actors can exploit difficult situations like natural disasters or geopolitical conflicts. Organizations will appear and claim to direct funds to victims, only to collect and keep the money from unsuspecting donors. A thorough vetting can help protect you.
Check For 501(c)(3) Status
Aside from researching the legitimacy of an organization you’re interested in, be sure to also check its tax exemption status through the IRS. To deduct charitable contributions from your taxable income, they’ll need to go to entities categorized by the IRS as 501(c)(3) organizations. This is also another way to ensure the money isn’t being pocketed by the organization itself.
4. Choose the Type of Giving
Did you know there’s more than one way to give? The tax treatment and benefits (to both you and the receiving charity) will differ depending on your giving strategy. Common types of donations include:
- One-time Donation: A one-off check or cash donation
- Recurring Gifts: Scheduled donations made regularly (monthly, quarterly, annually)
- Endowments: Donating either money or property, which then uses the resulting investment income for specific purposes (usually determined by the donor)
- Property Donation: Any type of asset donation (vehicles, land, art supplies, etc.) other than cash
Proactive vs. Reactive Giving
By creating a charitable giving strategy, you’re taking a proactive approach to planning out your annual donations. However, some people also choose to set aside certain funds for reactive giving as well. Reactive giving refers to donations made to fund unexpected or sudden causes, such as a friend’s GoFundMe for medical bills, a local school drive, or supporting a family in the community who lost their home to a fire. A giving strategy can help you achieve the best of both approaches.
5. Tax Considerations and Optimization
Charitable contributions to qualified charities can be deducted from your taxable income as long as you itemize your deductions. If you take the standard deduction, you cannot deduct your charitable contributions.
You and your advisor or tax professional may want to strategize when and how you make charitable contributions. For example, if you plan on taking the standard deduction this year and itemizing next year, perhaps you’ll want to wait until next year to make both years’ worth of contributions (so you can deduct them on your itemized return).
Depending on how much you plan to donate over your lifetime, it can be helpful to consider implementing the following tax-efficient charitable giving strategies as well:
Donor-Advised Funds
A donor-advised fund (DAF) is a charitable giving fund sponsored by a 501(c)(3) organization. Through this organization, you establish a fund and make irrevocable contributions to it over time. Your contributions to the DAF are tax deductible, earnings from investments within the fund grow tax-free, and you can recommend which charities receive distributions from the fund.
Charitable Trusts
Charitable trusts commonly fall within one of two categories – charitable remainder or charitable lead trusts.
Charitable Remainder Trusts: The donor establishes a trust specifically for charitable giving. The trust then distributes the cash (or assets) to the beneficiaries (including the donor, the donor’s family members, or a charity) over a specified period. Once the time frame has ended, any amount remaining in the trust is distributed to the charity.
Charitable Lead Trusts: This is essentially the opposite of a remainder trust. Funds are distributed to the donor’s charity of choice for a specific period. Once that time frame ends, anything remaining in the trust is distributed to the donor or their family members.
6. Create a Giving Plan
At the end or beginning of each year, set time aside to create a giving plan for the upcoming year. Along with your monetary donations, think about how else you’d like to get involved in your community or preferred charities. Commit a certain number of hours each month to volunteering or signing up to assist with upcoming events. By thinking and planning out your giving strategy ahead of time, you’re much more likely to follow through with it later.
Volunteering directly with your favorite organizations can be an incredibly fulfilling experience. Not only can you play a part in making the world a better place, you can also see first-hand how your donated resources are being used to help others. It’s an effective way to build more meaningful relationships with the causes you support. It also serves as an ongoing reminder of why you incorporate charitable giving into your financial plan.
7. Review and Adapt
You may want to adjust your giving strategy throughout the year based on what’s happening in your current season. You may have received a financial windfall and would like to increase your charitable contributions. Or, you may want to make changes based on recent events, such as natural disasters, political conflict, or legislative changes. Regularly check in with your charitable giving strategy to ensure it still aligns with your overall financial priorities.
Also use this time to celebrate the progress you’ve made toward your goals, reminding yourself of the good you’re doing and the impact you’re making. If you find your giving strategy hasn’t gone as planned so far for the year, you can also note what happened and what you can do to get back on track.
8. Involve Your Family and Loved Ones
One of the most effective ways to stick to your goals is gathering support from your circle of influence, such as families, friends, and coworkers. Encourage others to contribute to their favorite causes and remind them why giving back is so important. If you have children, involve them in the decision-making process and encourage them to volunteer alongside you. When you foster a culture of philanthropy, you build a supportive and uplifting environment that encourages others to develop their own giving strategies, too.
9. Amplify Your Impact
How do you amplify your impact? By letting others know what you’re doing, why you’re doing it, and how they can get involved. Explore ways to increase the reach and influence of your giving, whether it’s sharing on social media, talking to your customers, peers, or colleagues, or otherwise sharing with your community.
One way Abacus believes impact can be amplified is by focusing on social justice philanthropy – addressing the root causes of injustice across the country. Social justice philanthropy aims to connect donors directly with those impacted by injustices (social, economic, environmental) as a way to disrupt historical patterns of marginalization.
Creating Your Own Charitable Giving Strategy This Year
Are you ready to take action and make a positive difference in the world? Developing a custom charitable giving strategy is an effective way to make an impact, experience personal fulfillment, and give with purpose. To learn more about incorporating giving into your financial plan, reach out and schedule a call with an Abacus advisor today.
Disclosure: This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.
