Charitable giving is a powerful way for business owners to support causes they care about while also leveraging significant financial planning benefits. Donor Advised Funds (DAFs), charitable trusts and direct giving are some of the most common and strategic ways companies can align their philanthropic and financial goals.
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Tailoring charitable giving based on factors like company size and financial outlook can help businesses achieve positive social impact, financial efficiency and significant tax savings as well as build a lasting philanthropic legacy.
Donor-advised funds (DAFs)
A donor-advised fund (DAF) is a charitable investment account enabling business owners to contribute money to support charities. It allows taxpayers to allocate wealth into a separate account qualifying them for an immediate tax deduction upon funding of the DAF. Control over DAFs is managed by an administrator, but the owner can provide input into the timing and amount of funds to distribute to the charities of their choosing.
This flexibility makes DAFs different from other types of charitable giving such as private foundations requiring legal annual donation percentages of assets and added (often substantial) administrative costs.
Charitable trusts
Charitable trusts, such as charitable remainder trusts (CRTs) and charitable lead trusts (CLTs), provide businesses with tax-efficient and flexible charitable giving opportunities. CRTs provide income to the business first, leaving the remainder of the funds to charity. In reverse, CLT income goes to the charitable organization first, with the remaining assets returning to the business.
Business owners can reap tax advantages from both CRTs and CLTs but in different ways. CRTs offer an immediate charitable income tax deduction and capital gains tax deferral. Estate taxes are reduced once the assets are removed from the estate. CLTs have less focus on immediate income tax deductions, and instead, offer gift and estate tax reduction benefits.
Direct giving
Organizations that want to ensure contributions go directly to charities may consider direct giving. The process is simple, easy to manage and requires no intermediaries. Business owners retain full control over how and when donations are distributed.
From a tax perspective, direct giving can provide immediate benefits by removing assets from a business’s balance sheet or an owner’s estate, though other methods like DAFs and charitable trusts may offer additional long-term tax planning advantages.
Practical tips for maximizing charitable giving
The most beneficial method of charitable giving for businesses depends on multiple factors. A company’s size, financial goals, tax planning and philanthropic objectives are all considerations for how a business moves forward with contributions. To proceed with the best means of giving, it’s helpful for company owners to think about three factors: gift allocation strategy, high-tax environment management and timing of donations.
Gift allocation strategies
Gift allocation involves deciding how much to give and where to support financial goals and philanthropic impact. DAFs are ideal for businesses wanting to make a large donation with more flexibility on timing, while also receiving an immediate tax deduction. Companies with high-value assets looking to build a legacy of philanthropy can benefit from charitable trusts by reducing estate taxes, capital gains taxes and income taxes.
Smaller or lower-taxable income businesses may be more attracted to the direct giving route for its immediate, direct impact and low administrative burden.
Managing high-tax environments
Businesses with large tax liabilities can capitalize on charitable giving to optimize tax benefits. If a company has a high-income year, for example, a tax deduction can be claimed the same year the donation is made through a DAF — even when funds are distributed to charitable entities over time. Once a substantial donation is made to a DAF and the deduction is taken and spread out over time, it goes into an investment fund, which can grow tax-free.
Charitable trusts can provide robust tax advantages to business owners. After assets are transferred into a trust, companies can reduce income and capital gains taxes. This enables assets to accumulate without accruing taxes.
Businesses can contribute appreciated assets to both DAFs and charitable trusts before selling them to help avoid capital gains taxes. In this case, it’s vital for companies to time donations before large asset sales.
Unlike DAFs and charitable trusts, direct giving — although providing immediate tax deductions — is not the best solution for long-term financial benefits.
Timing donations
Deciding when to make charitable donations is essential for maximizing both financial and philanthropic benefits. Contributions can align with financial cycles, tax planning or strategic business goals. In the case of DAFs, businesses have found it advantageous to allocate contributions at the close of the year to reduce taxable income and secure an immediate deduction.
Those companies wanting to extend charitable giving throughout the year find charitable trusts desirable since they enable the allocation of periodic philanthropic donations. Still, other companies seeking to provide immediate relief — for example, to aid timely social issues or environmental scenarios — may opt for direct giving.
Building a lasting philanthropic legacy
Business owners often want philanthropy to be a lasting facet of the enterprise they’ve built. Incorporating charitable giving into business financial planning serves as a broader financial and legacy strategy.
Of the three discussed charitable giving methods, DAFs and charitable trusts are designed for the long run. DAFs are ideal for long-term legacy planning, enabling owners to leave part of their estate to the DAF, dollar-for-dollar as a state deduction. Charitable trusts enable a business owner to bequeath an interest in their business to a CLT or CRT, providing an estate tax charitable deduction for successors.
Ultimately, working with financial experts can help businesses craft a charitable giving plan to meet the express needs of short- and long-term financial and philanthropic goals, and integrate a lasting legacy plan that aligns with the company’s values and future outlook.
Author: Tammi Jackson is a Senior Wealth Planning Strategist for BMO Wealth Management’s Arizona team. Dedicated to assisting business owners at every step of their journey, BMO Wealth Management is part of a global private bank with a significant Arizona presence that offers the resources and local market understanding needed to advise clients at all levels of wealth. More at uswealth.bmo.com.
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