Smart Giving In Tough Times

OCEAN CITY – It’s not surprising that the amount of charitable contributions goes down when the markets do. But as much as giving may fluctuate with changes in economic conditions, the long-term trends show that it remains within a tight range — usually from 2.2 percent to 2.4 percent of disposable personal income. Generally, total giving is about 2 percent of GDP, according to a June 2009 report from the GivingUSA Foundation, says David E. Ratcliffe, Director of The Merrill Lynch Center for Philanthropy & Nonprofit Management.

Providing for your favorite charities in this economic environment might seem more difficult — even while the causes may need your help more than ever. But maintaining your support can be as simple as making a few strategic adjustments, says Ratcliffe.

For instance, consider adjusting the amount of stock you donate. A major consideration in donating stock is the built-in capital gains tax liability on the appreciated stock. Donating appreciated stock can help reduce your exposure to capital gains tax. But donating a stock with little or no gain will not result in the same tax benefit for the donor. If you expect your depreciated shares to rebound, you may wish to hold on to your stock position rather than having the charity sell it at its depreciated value. What’s more, if the stock is valued at below the basis that you paid for the stock, you may prefer selling it to capture the loss, which allows you to offset other gains, either immediate or carryforward. You can then donate the cash. Of course, giving cash has its disadvantages, too, in a time of tightening credit, when many investors want to maximize liquidity in their portfolios. That’s why all donation decisions are by definition individual.

One way to help ensure a steady income stream for yourself in the near term while setting aside a generous gift is by making use of a charitable remainder trust (CRT).

Under a CRT, you place assets in a trust and receive regular distributions that you determine when you create the trust. You may decide on the distribution amount based on a percentage of the funding value (annuity) or as a percentage of the annual valuation (unitrust). When the trust expires, the remaining assets go to the charities of your choosing. Because you have flexibility in deciding the payout rate (the percentage of the trust amount you receive each year), you could end up qualifying for a deduction that may be considerably greater than the interest you would get in an ordinary interest-bearing account or cash-equivalent investment, especially given the current low interest rates.

If you don’t need as much income now and you’re concerned about legacy planning, a charitable lead trust (CLT) may be a good alternative. With a CLT, the charity receives income for the term of the trust, with the remaining assets reverting to you or your beneficiaries when the trust terminates.

You can also give without encroaching on your current cash or investment portfolio by making annual charitable contributions to a donor-advised fund (DAF). This provides you with an annual income tax deduction along with the ability to recommend sporadic grants at your discretion to the charities of your choice.

Ask your financial advisor about these strategies for supporting your favorite causes while keeping your personal financial goals on track.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)