How many times were you asked for a donation this past week? Probably several!
Maybe you got a letter in the mail, passed an offering plate at church, saw a personalized ad on your Facebook feed, or were asked to round up your change at the check out line.
The question is: how do you decide which causes you give to?
Now there’s a whole laundry list of causes that would be happy to accept your donation: your alma mater, St Jude’s, YMCA, wildlife conservation, fine arts, political candidates, etc.
All of these causes raise millions every year. And the reason they get big donations is because these organizations paint a very vivid picture of the positive impact they are having in the world. The question I would ask you is whether your church is doing the same?
Your church is called to cast a compelling vision of the positive impact it is having in this world. Not only that, but your church should also be inviting its members to partner financially in accomplishing that mission.
Did you know that “giving” is a gift? Romans 12 teaches us how God gives His children spiritual gifts like teaching, service, administration, and including in that list is giving! Remember that God has given some people the capacity and the gift to give! So we need to learn to accept that truth and be grateful for it.
Churches might be a little hesitant to request large donations because money has the ability to skew people’s motives. That’s a healthy concern. But consider this as well: if someone came to your church that had a great singing voice, then you would embrace and celebrate their gifting to minister to your church, and if someone came in with a heart of service and they wanted to do landscaping around the church for free, then you would embrace and celebrate that.
So when someone comes to the church and says God has blessed me financially and I want to give a sizable gift, then embrace and celebrate that as you would other people using their gifts!
That doesn’t mean you have to trumpet out publicly who gave and how much was given. I think we would be wise to heed Jesus’ words about the importance of anonymity and humility in giving (Matt 6:1-4).
But the church should celebrate when a large gift is given and should address from time to time that there are ways for people to make a big impact with their giving.
In today's world, financial resources often drive the impact of organizations, and that includes churches. The budgets and capital campaigns of many churches are primarily supported by a small minority of their congregation.
So let’s explore four innovative ways to make substantial donations to your church while also enjoying significant tax benefits. Whether you're a church leader looking to equip your congregation or an individual seeking to make a lasting impact, these are strategies you need to be familiar with:
1. Will/Named Beneficiaries
This is one of the easiest ways to make a substantial gift, but it can still be overlooked. Very often people with significant resources are charitably inclined. I know the stereotype is that rich people are the stingiest people in the world, but research doesn’t bear that out. Of course there are Ebenezer Scrooges out there, but wealthy people are statistically more likely to give and give larger amounts. A lot of wealthy people are very conscious of that fact that they’ve been blessed and want to use their money wisely and be generous.
One of the simplest ways to do this is to consider your church in your estate plan. It’s important to make sure your loved ones are cared for after your death, and I think its a wise goal to leave an inheritance to the next generation. Second to that, I would encourage everyone to consider their church as part of their estate plan. You may want to designate that specific percentage of your estate is given to the church. Or perhaps you want to designate specific assets like a piece of property, life insurance, investments, cash, or even retirement accounts.
There are 2 ways to leave an asset to a person or an organization like your church - name them in the will or name them as a beneficiary. Naming beneficiaries is a better option when applicable. In fact, your named beneficiary supersedes your will. So if you have your kids listed as beneficiary on your 401k but your will says that it goes to your brother, the beneficiaries have precedence. But not everything allows you to name beneficiaries. For instance, you can name beneficiaries on your life insurance policy or your retirement account but not on your house or car.
Image Source: Alliance America
In fact, if you want to be really smart think about this: your beneficiaries may or may not have to pay taxes based on the assets you leave them.
Consider this: life insurance proceeds are generally tax free, and if your beneficiaries are inheriting stock or other investments that you own outside of a retirement account then they get a step up in the cost basis (this means if you bought investment X for $5, but it was worth $20 when you died, then your heirs don’t have to pay capital gains taxes on the $15 of growth). They would only have a capital gain if they sell the investments for more than it was worth on the day you died.
But withdrawals from a 401k or an IRA would be taxable for your beneficiaries.
So think about this: if you plan to give 1/4 of your net worth to your church at your death, be strategic about which assets you leave them. If you leave your IRA to your kids they would owe taxes on the withdrawals, but if you leave the IRA to the church they are tax exempt! You see what I mean?!
This is where a good financial planner, estate attorney, and tax preparer make a big difference. If you haven’t already made that game plan, then start assembling a team of advisors to help you do that. Not only could it save you and your heirs thousands of dollars, but it means more money that goes toward gospel work.
2. Donor Advised Fund (DAF)
This type of accounts acts similar to an endowment fund. You can donate a large sum of money to a Donor Advised Fund and still maintain control over how that money is invested and where/when it is donated.
Here are 3 common situations where a DAF becomes a really helpful option:
You have investments (like company stock or mutual funds) that have risen significantly in value. You plan to give this money away but you would also like to continue to invest the money so that it grows into an even bigger gift down the road.
Here’s an example: you own $1 million of ABC stock but you originally purchased those shares for $50k. If you sell the stock and then donate the cash, you will have a $950k capital gain and 20-30% could easily be eaten up in taxes. But on the flip side, if you keep the money in ABC stock, you are taking a big risk with a single company. The stock market as a whole has a long-term track record of growth, but the performance of a single company is far riskier. If you keep the money in that single stock, you are risking that it could fall considerably in value.
This is where a DAF can make a huge difference!
In this scenario, you can donate the stock or mutual fund shares into a Donor Advised Fund. The fund itself is considered a charitable organization, because the money has to be given to a non-profit eventually (you can’t put money in a DAF and then change your mind and take it back or use to buy something for personal use).
Image source: GiveDirectly
When you make the donation, you are able to itemize that donation on your tax return and get a deduction on your taxes for that year. But you also get another huge tax benefit: after the investment is donated to the fund, you can then sell it and 0% is owed in capital gains because it is being sold by a charitable organization. So 100% of those funds can be given to your church without anything coming off the top for taxes!
You can then reinvest the money in a more appropriate portfolio.
2. You want to establish a long-term fund to maximize your gift over the long term.
This is what large institutions like Harvard, Yale, or even sovereign wealth funds like Norway or Saudi Arabia seek to do.
If you have a large amount of money, you can choose to deploy it all at once and do a lot with it now. Or you can be a little bit more strategic and long-term in your planning and only deploy a certain amount each year, leaving the majority of the money to continue to be invested and grow.
So by spreading out your gifting year by year you could give way more over a long period of time.
For example, the Smith family wants to set up a fund to support missions work. They donate $1 million into the DAF and each year they distribute $50k. They do this for 20 years, giving a cumulative gift of $1 million. But during that same time, let’s assume that their investments had an average annual return of 7%. This would mean that they would have approximately $1.8 million still in the account and are now able to give almost $3 million instead of the original $1 million!
3. You had a large income year and are looking to minimize taxes
Let’s say you sell your business or a rental property, and now are going to have a high income year (and high tax bracket to go along with it). You would likely be looking for ways to minimize your taxes.
If you are planning to give some of the proceeds of that sale, then I would, of course, encourage you to give right away.
But maybe its a scenario where you are going to give some now and some later. Perhaps 10% now, and another 20% that you are still deciding on how/when.
Here’s where the DAF becomes a helpful tool. You gift that undecided portion to the DAF now and get the tax deduction which lowers your taxable income for this year. Then you can invest the money or leave it in something very conservative paying interest for the time being until you decide ultimately how/when to gift the money
3. Charitable Trusts
Whenever you start talking about trusts, 90% of people tune out because often the assumption is that a trust is only something multi-millionaires use. And while its true that the wealthier you are the more likely a trust is something you should consider, you’d be surprised at how often the “average” person could benefit from setting up a trust.
In particular, I want to talk about 2 types of charitable trusts: a charitable remainder trust (CRT) and a charitable lead trust (CLT).
Let’s start with a Charitable Lead Trust. These actually function a lot like a DAF.
With the CLT you transfer property (cash, investments, etc.) that are set up to benefit your church. The trust stipulates the amount of money that’s given and for how long. At the end of the time period (which is usually the donor’s life) the remaining assets are passed on to the donor or their beneficiaries.
With a Charitable Remainder Trust, it works the other way around. You create the trust, fund it, and then the donor receives monthly income from the trust. When the term of the trust expires (after a set period of time or when the donor dies) then the remaining assets are given to the church.
So a common use of CRTs is when you have someone who still has a nest egg they rely on for their income, but they want to give those funds away at their death. The CRT is established to make sure their immediate needs are met, and then whatever is left over at the end of their life goes to the church.
Image Source: Family Wealth Management
Not long ago, I talked to a pastor who had 4 families in his church that had set up CRTs and named the church as the beneficiary. For church members that want to make a legacy gift, but don’t have the flexibility to make one during their lifetime, CRTs can really be a win-win!
4. Qualified Charitable Distribution (QCD)
Last but certainly not least is something called a qualified charitable distribution. Don’t be thrown off by the jargon, it’s a pretty simple one to understand.
Most people save for retirement in their workplace retirement accounts 401k, 403b, etc. and most of those accounts are pre-tax. Meaning you didn’t have to pay taxes on the contributions but you will owe taxes when you withdraw.
So let’s say you have quite a bit of money accumulated in your 401k or IRA and you know you will need to pay taxes when you start taking the money out. Starting at age 70 1/2, you are allowed to withdraw up to $100k per year per person and send that money directly to a qualified charity (like your church).
Image Source: GiveDirectly
By making this qualified charitable distribution, that withdrawal is not taxed at all! So it is, in essence, a tax-free withdrawal. Now, of course, many people need these funds to supplement their income in retirement and don’t have the luxury to give that money away.
But for those who have other sources of income and don’t need to live off their IRA or 401k, this can be a great strategy. Especially since the IRS requires you to start taking out a minimum amount each year starting at age 73.
So think about it, if the IRS is going to make you take out a certain amount each year anyway, and you don’t need that money, use it instead to make your charitable donations that you were going to do anyway and avoid taxes!
Conclusion
Remember that these strategies are not one-size-fits-all. You need a good team around you to execute them correctly. Talk to your financial advisor, your tax preparer, and an estate attorney to make sure you are using the right strategy for you.
These are some really exciting options to make big gifts to your church, be wise about maximizing their impact, and see the gospel go forward. Because when it’s all said and done the most important thing we can do is invest in God’s kingdom.
If you have any questions about these strategies please let me know. Whether you personally are looking to implement one of these things for yourself or you would like to help someone who is looking to make a large donation to your church, I’ll be glad to help. You can always schedule a quick call with any questions you have.