Charitable Giving for the Ultra High Net Worth

When people make donations to charitable organizations that hold special meaning to them, it’s a win-win scenario. The individuals feel good supporting these charities and what they stand for, while the charities benefit from the financial backing they need to survive and continue doing their important work.

It’s also noteworthy that individuals can earn a tax break for their philanthropic efforts if they donate to a qualified charitable organization, which means they may lower their tax obligation as they do their part to make a difference in their community and beyond.

For ultra-high-net-worth (UHNW) individuals potentially facing a sizeable tax burden each year, it is important to think strategically in order to maximize the tax savings opportunity and charitable impact of their giving. By common definition, UHNW individuals are typically those with $30 million or more in investable assets.

For the UHNW, charitable giving involves more than just writing a check. It’s a deliberate and ongoing part of their legacy planning and overall wealth management plan, offering tax benefits, fostering family collaboration, and paving a path to make a lasting impact on society. They often leverage advanced financial strategies like Donor-Advised Funds and private foundations to help maximize their philanthropy, benefit from income and estate tax deductions, and potentially reduce (or fully avoid) capital gains tax. 

Charitable giving strategies for the UHNW

We’ll take a look at the two strategies mentioned above, providing a basic overview of which one(s) may be suitable for your particular financial circumstances and philanthropic objectives. We will also consider other effective forms of planned giving.

1. Donor-Advised Fund (DAF)

DAFs tend to be a popular option for UHNW individuals. A DAF is an account that lets you claim an immediate income tax charitable deduction in the year of a contribution, and then carry out your charitable giving over the long-term by directing grants to your favorite organizations. The account can grow tax-free, with all growth increasing the funds available to direct to the organizations you support. Many UHNW individuals contribute cash,  securities, and complex assets to DAFs, with certain assets  generating even greater tax advantages.

2. Private foundation

UHNW individuals and families may wish to set up a private foundation, which is a registered charity that executes on the family’s chosen philanthropic activities. As the name suggests, private foundations are funded with private family funds. Like DAFs, contributions to private foundations generate a charitable deduction. Private foundations offer greater control over grant-making and can accommodate certain more complex philanthropic strategies. 

A board of directors/trustees is appointed to oversee this foundation, and the board’s duties include receiving charitable contributions, managing and investing charitable assets and making grants for charitable purposes aligned with the foundation’s goals. If it suits your strategic giving plan, grants may be made from a private foundation to a DAF. Charitable contributions to both DAFs and private foundations at death may receive an estate tax deduction.

Planned giving

In addition to these two common strategies, there are approaches to planned giving that UHNW individuals may also use in a tax-efficient manner. Briefly, some include:

• Charitable “split-interest” trusts. Charitable “split-interest” trusts are  legal arrangements created to hold  assets, such as money or real property, and “split” the benefit of those assets between charitable and non-charitable beneficiaries. There are two primary forms of charitable trusts. A charitable remainder trust is designed to provide you (and other individuals, if you so designate) with a steady income stream for a period of years, with the remainder interest in your trust passing to charity upon the trust’s termination. Conversely, a charitable lead trust provides a charity (or charities) with income for a set term, with the remainder reverting to you and/or other individuals you have designated. In each instance, the charitable deduction is determined based on the value of the trust property destined for the charitable beneficiary/ies.
• Charitable bequest. With a bequest, charities are named as a beneficiary in a will or trust. An individual’s federal estate and gift tax exemption is currently $13.99 million,¹ and generally, you’re not limited in the dollar amount of charitable bequests used to lower your estate value, so it’s an impactful tax-reduction strategy.
• Qualified charitable distribution (QCD). Withdrawals from an IRA can be used to make charitable contributions. If you’re aged 70.5 or older, you may use a QCD to donate directly to a registered charity from your IRA, which, subject to certain limits, can satisfy your required minimum distribution (RMD) and help you avoid taxable income.
• Beneficiary designation. Naming charities as beneficiaries of  life insurance policies or retirement accounts allows a charity to receive the funds from your registered plan in a tax-efficient manner that benefits both the charity and the donor’s estate. This can be particularly helpful in the instance of a retirement plan since, unlike individuals, charitable beneficiaries are not subject to income tax on distributions.
• Charitable gift annuity. In this financial arrangement, the donor receives a fixed, tax-advantageous income stream for life, with the remainder going to charity. 
• Pooled income funds. Donors will contribute assets to a comingled charitable trust in exchange for a proportional income interest and a current income tax deduction for an anticipated charitable remainder interest.

Other donation strategies

So far, we’ve explored DAFs, private foundations and several other planned giving strategies. Here are two final considerations that may help you meet your philanthropic goals and achieve tax-effective giving.

• Donation of appreciated assets. Donating long-term appreciated securities or real estate can provide a fair market value tax deductionwhile also potentially  avoiding capital gains tax, dramatically increasing the ultimate gift to your chosen charity. 
• Pre-liquidity event planning. A charitable contribution of business interests in advance of a sale or other liquidity event may provide a significantly tax-advantaged outcome, given the combination of the income tax charitable deduction and the avoidance of capital gain upon exit. This can be a deeply impactful but complex strategy and is important to explore well in advance of a liquidity event.   

Important considerations

As you can see, there are several ways for UHNW individuals and families to approach philanthropy. These strategies are often complex and not necessarily right for everyone. We believe it’s very important to work with a Corient Wealth Advisor while also consulting an estate planner and other tax professionals. You will want to ensure you’re implementing the most effective, tax-efficient charitable giving strategies for your specific circumstances.

It’s also important to first identify the causes and organizations that are most meaningful to you and your family. Involving family members in the philanthropic process helps create a shared vision and legacy that can honor your wishes and support agreed-upon causes.

¹ https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

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