Giving back after a financial windfall: A case study approach

If you’re anticipating a significant financial event that will bring you new liquid wealth, such as selling a business, cashing in stock options, or receiving a large inheritance, you may be considering how to give back to causes that are important to you. While these events can bring new wealth, they often come with complex tax and legal considerations.

Below, we’ll explore key factors for structuring your philanthropic strategy, highlighted by a real-life example of how one individual navigated this journey.

Key considerations for donating wealth

1. 1. Timing of the gift:
   Charitable donations made in the same year as a major financial windfall can help offset tax liabilities. Donations must come from the same individual or entity that has the tax liability to use this benefit.
2. 2. Deciding how much to give:
   Working with financial and tax advisors can help you determine an appropriate donation amount, balancing your family’s needs with the tax benefits you seek. There are limits to how much you can claim annually, though any excess can be carried forward for up to five years.
3. 3. Choosing which assets to donate:
   Donating assets like stocks or real estate rather than cash can offer greater tax savings. For example, donating certain types of capital property avoids taxes on capital gains, and donations of life insurance policies can also provide tax advantages.
4. 4. How to structure your gift:
   For larger donations, consider options like direct donations, establishing a private foundation, or using a donor-advised fund (DAF). The latter is a simple, cost-effective option for ongoing philanthropic giving.

Case study: Cindy’s giving strategy

Cindy, the owner of a manufacturing company, sold her business and realized a substantial profit. While the sale created significant wealth for her family, it also resulted in a large tax liability. Cindy wanted to give back to her community and various charitable causes, but needed a strategic plan.

Here’s how Cindy’s Richardson Wealth advisor helped her structured her giving approach:

• Donor-advised fund (DAF):
  Cindy set up a DAF through her financial advisor at Benefaction Foundation, where she and her children can decide annually which charities to support. The fund allows for greater flexibility and control over the donations.
• Securities donation:
  Cindy donated publicly traded securities from her investment portfolio to the DAF. This not only supported her philanthropic goals but also helped her avoid capital gains taxes on those securities.
• Life insurance donation:
  She purchased a life insurance policy with a single premium, which would eventually be donated to the DAF. This provides her with an immediate charitable tax credit and benefits the DAF upon her passing.
• Cash donations:
  Cindy also contributed cash to the DAF from the sale proceeds, allowing her to continue supporting causes important to her.
• Legacy planning:
  Cindy’s long-term vision for the DAF is to create a legacy philanthropic vehicle for her family. She and her children will work together to decide which causes to support each year, and Cindy hopes this will continue as a family tradition for future generations.

By using a DAF and collaborating with financial and legal experts, Cindy created a thoughtful, tax-efficient philanthropic plan that reflects her family’s values and ensures her giving continues for years to come.

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If you’re expecting a significant financial event, planning your charitable giving early can help maximize tax benefits and make a lasting impact. Whether through direct donations, life insurance, or a donor-advised fund, structuring your giving in advance can provide both personal satisfaction and financial advantages. Talk to a Richardson Wealth Investment Advisor about creating a philanthropic plan.