We’re in the middle of charitable-giving season, when people embrace the spirit of the holidays to support the organizations and causes they care about.
Generosity isn’t the only motivation, however. Many people want to make end-of-year donations for tax purposes. To maximize charitable deductions. To avoid paying capital gains on appreciated securities or assets. To remove assets from their estate.
But there’s one major obstacle that keeps many people from being able to take advantage of both benefits: Their desire to give anonymously.
There are many reasons why some of your clients don’t want their personal information associated with their giving activities.
Some don’t want their identity to be publicly associated with a specific organization or cause. Others don’t want their contact information to be sold to other charities and fundraising firms.
Sure, they can anonymously send mail money orders or cash through the mail (which charities hate to deal with, by the way), but these methods can’t provide the documentation they need to claim these deductions on their tax returns.
Fortunately, there are several ways your clients can give anonymously without sacrificing charitable tax benefits. In some cases, the solutions involve establishing investment accounts that you may be able to manage.
Donor-Advised Funds
Donor-advised funds deliver the grantmaking benefits of private foundations without the complexities and costs of establishing one.
And, unlike private foundations, donor-advised funds can offer the same charitable tax deduction benefits as direct gifts to nonprofits: up to 60% of adjusted gross income for cash donations, and up to 30% for donations of appreciated assets. When held at least a year, donated assets are usually deductible at their fair market value. And donor-advised funds don’t have to distribute at least 5% of their principal to charities every year like private foundations do.
Scott Marks, a senior financial advisor with Summit Wealth Group, thinks that donor- advised funds can be great tools for clients that are charitably inclined and want to maximize the tax benefit in a given year.
“For example, if you wanted to give $10,000/year to a local charity for 10 years, funding $100,000 all at once to a donor advised fund provides a much greater tax impact than taking the deduction on an annual basis since charitable giving requires itemizing deductions on the tax return,” he says.
Every subaccount established with a donor-advised fund sponsor must be named, but it doesn’t have to include your clients’ names. Their personal information can also be excluded from communications between the sponsor and the designated charities.
In the past, donor-advised fund accounts carried initial minimums ranging from $5,000 to $50,000 or more. Today, most can be established for less than $1,000 and a few have no initial minimums.
These tax and anonymity benefits make donor-advised funds a good option for clients who want to establish a strategic charitable giving vehicle for themselves or their families.
But clients need to know that there are limitations. Authorized donors can only recommend grants, which must be approved by the donor-advised fund sponsor.
Assets in the account are generally managed by the sponsor — most often, a mutual fund company that invests the money in their own proprietary funds.
In some cases, advisers can be given oversight over their clients’ donor-advised fund investments, but the sponsor ultimately has veto power over any recommendations the adviser makes.
Charitable Remainder Trusts
Some of your clients are looking for immediate charitable tax deductions but they’re not in a rush to send that money to a charity. Or they’d like to use some of the income generated by the trust for their own purposes (or provide some extra money to their children) for a certain period of time before the remaining amount is ultimately donated to charity. For these clients, a charitable remainder trust (CRT) might be an appropriate option.
CRTs combine some (but not all) of the charitable tax benefits of direct donations with the ability to provide regular income to non-charitable beneficiaries. They also offer some of the same tax benefits as direct donations or donations to donor-advised funds.
Grantors typically donate cash or appreciated assets to the CRT, which sells them to provide principal that is invested either in an annuity or in a portfolio of stocks and bonds to generate income.
Over a predetermined period of period of time the CRT distributes a percentage of income (usually 5% or more) generated by the trust to designated beneficiaries. At the end of the term, often the death of the beneficiaries, the remaining interest (which must be at least 10% of the initial balance) is distributed to designated qualified charities and the trust is dissolved.
The trust itself doesn’t need to be named after the grantor, so the remainder interest can be donated anonymously.
Another benefit: CRTs generally don’t have to pay federal income taxes on the sale of donated appreciated assets or on income generated by the trust. However, beneficiaries may have to pay taxes on distributions they receive.
Some Issues to Consider
CRTs cannot donate remainder interest to private foundations or donor-advised funds. And since CRTs are irrevocable trusts, grantors relinquish control of any assets transferred into the trust. However, this also means that donated assets will be excluded from their estate when they pass on.
Beneficiaries can only receive income distributions from the trust — the principal itself can’t be removed until the term ends and it’s donated to charity.
Furthermore, calculating charitable deductions for donations made to a CRT can involve complicated calculations that vary whether the CRT is structured as a charitable remainder annuity trust (which invests the value of all donated assets into an annuity) or a charitable remainder unitrust (which invests assets in a portfolio designed primarily to generate income).
Setting up a CRT can also be expensive, since grantors generally need to hire an estate attorney to create the trust documents. Annual administrative and trustee fees — which are paid directly out of the trust — may be thousands of dollars, which is why it’s generally not worth it for clients to establish one for less than $1 million.
Another factor that advisers need to consider: If the CRT is established with a large bank trust company, advisers may not be granted discretionary authority over investment decisions. These decisions are usually handled by the bank’s in-house advisory team.
However, if the CRT is established in a state that allows for directed trusts administered by a corporate (non-bank) trustee, the adviser can be given the authority to make investment decisions.
Using “Anonymizing” Intermediaries
Establishing a charitable giving vehicle such as a donor-advised fund or a charitable remainder trust may be overkill for clients looking for an easy way to give anonymously without sacrificing charitable tax benefits.
Some organizations and companies now offer to act as “middlepeople” between donors and charities.
Charity Navigator is one of them. This internationally known, independent nonprofit rates thousands of public charities in terms of financial accountability, transparency, and effective use of donations.
With its Giving Basket program, Charity Navigator provides a unique way for donors to anonymously support nonprofits that interest them.
Donors make a single donation to their Giving Basket account. They then specify how their donation will be allocated to one or more nonprofits in Charity Navigator’s database. Donors can choose whether any personal information — or none at all — should be disclosed to the charitable recipients. Charity Navigator itself provides the receipts donors need for tax filing purposes.
Another option is to use one of several anonymous donor companies that have emerged up in recent years.
One of the most well-known firms is Silent Donor. The company has established its own donor-advised fund, the AnonDo Fund, to which anyone can make charitable donations using Silent Donor’s online payment platform. The donor can then ask the AnonDo Fund to direct their anonymous donations to qualified nonprofits.
Like any donor-advised fund, the AnonDo Fund reserves the right to approve or deny requests. But according to its website, it will only reject requests for donations to political campaigns and PACs.
Since donors are giving to the AnonDo Fund (and receive a receipt for their donation), using Silent Donor offers the same tax benefits as giving directly to a public charity.
One Popular Giving Strategy That Can’t Be Anonymous and Tax-Free
Several advisors I know have been asked by their older clients whether qualified charitable distributions (QCDs) can be used to make anonymous donations.
For those unfamiliar with them, QCDs allow those over age 70 to make tax-free withdrawals of up to $105,000 (in 2024) each year from their IRA if this money is donated to a qualified nonprofit.
Many seniors over age 73 now use QCDs to offset some or all of their annual required minimum distributions (RMDs), which can lower their tax bills.
Unfortunately, QCDs don’t offer either anonymous giving or charitable tax benefits, according to Kari Apel, chief financial officer with Midwest Financial Group.
“QCDs are not deductible as charitable contributions on Schedule A. And for the distribution to count as a QCD, the IRA owner must get a written acknowledgment of their contribution from the charitable organization before filing their return. In general, the acknowledgment must state the date and amount of the contribution and indicate whether the donor received anything of value in return for the donation,” she says.
Nor can QCDs be donated to any donor-advised fund sponsor, which rules out Silent Donor.
However, Charity Navigator claims that its Giving Basket meets IRS qualifications for validating QCDs because it provides documentation of donations made from the donor’s account to public charities.
The Value Financial Advisors Can Bring to Charitable Giving
For clients who don’t want their names associated with a donation, it’s relatively easy to give anonymously. Just use cash or a money order.
The complexity comes in when they also want to maximize the tax benefits of giving. According to Marks of Summit Wealth Group, that’s where financial advisors can prove their value as financial planning partners.
“Advisors do a great job of helping our clients plan for the big goals in life — retirement, education, home purchases — but oftentimes we neglect planning for charitable giving. I would challenge every advisor to simply ask their client if there are charitable causes that are important to them, and then offer some solutions to help them plan to support them strategically.”
Jeffrey Briskin is director of marketing at a Boston-area financial planning firm and the principal of Briskin Consulting, which provides content and digital marketing services for asset managers, TAMPs, trust companies, and fintech firms.
