The Charitable Planning Mindset

With a charitable planning mindset that takes the long view of your charitable giving, you can increase your lifetime giving impact.

If a charitable legacy is a financial priority, you may think the best way to maximize your charitable giving is to simply increase your donations, but a charitable planning mindset takes the long view. This mindset is all about maximizing your charitable giving return on investment (ROI). In some instances, this may mean increasing your charitable donations, but in others it may mean cutting back on your charitable donations to prioritize paying off debt, bunching your donations, taking advantage of employer charitable matching programs, etc.?

Laying the Foundation?

If you’re struggling to pay off debt or create an adequate emergency fund, and you’re still thinking about your charitable legacy, I applaud your commitment, but you may actually be able to increase your lifetime giving by focusing on first building a strong financial foundation. I have entire blog posts devoted to each of these topics, but here are the elements I consider essential to financial health and how they can help you build your charitable legacy.?

Cash Emergency Fund - I cannot stress enough the importance of having an adequate emergency fund.?One financial mishap or hardship can derail even the most grandiose legacy plans. If you don’t currently have an emergency fund, start with a modest goal of saving $1K in cash (preferably somewhere you can’t get to it easily if temptation strikes) then build up to 3-6 months’ worth of expenses.?

Insurance - Much like an emergency fund, insurance helps limit the risk of unexpected events derailing your charitable planning. There are myriad types of insurance but based on my experience doing insurance reviews with clients, the most overlooked or misunderstood types of insurance tend to be disability insurance, life insurance, and umbrella insurance.?

Responsible Debt Management - You’ll notice I don’t call this section “eliminating debt” or “paying off debt completely”. Though I’m a firm believer in paying off higher interest debt, such as credit card debt, I don’t think paying off all debt is always the best long-term option.

Not all debt is created equal, and some debt (for instance, mortgages or student loans) can actually be useful in helping to grow your net worth; but if you are overleveraged and have too much debt, it can decrease your lifetime giving potential. In this case, it may turn out that you need to make paying down debt a higher priority than near-term legacy giving. After all, every dollar you pay in interest and finance charges is one less dollar that can be used for giving.?Plus, reducing debt can bring flexibility and open doors of opportunity that wouldn’t be there otherwise.

Savings for Retirement - If you have not been diligent about saving for retirement, you can end up in a position where you’re having to work for much longer than you want to, even if just part-time. And due to health limitations or diminishing career opportunities, this can often mean earning less in these later years than you may have grown accustomed to in your peak earning years.

All of this can translate into having to work just to meet your needs in these retirement years, which - needless to say - will constrain your lifetime giving impact. If, on the other hand, you leverage the power of compound growth, the time value of money ensures that even modest sums saved regularly in your 20’s and 30’s will grow many multiples by retirement age, typically providing much more than needed to support your living needs in retirement and leaving plenty of wealth surplus for legacy goals.??

Once the foundation is laid, then we can begin to think more strategically about charitable planning. This is where things start to get interesting, where we can analyze existing laws and tax code to make informed decisions in service of this very specific goal of maximizing lifetime legacy giving.?

Minimizing Taxes?

A common theme in maximizing lifetime legacy giving is minimizing taxes and for good reason.?Morningstar research has shown that the average investor lost 1-2% of return annually to federal income taxes from 1926 to 2018. Two percent of extra return annually on a hypothetical portfolio of $100K could result in an additional $1 million after 40 years.?That is a lot of wealth surplus that could be used toward legacy goals!

Fortunately, lawmakers have generally recognized the value that charities and non-profits bring to society, so charitable giving is encouraged through favorable tax laws. Thus, for those of us interested in charitable planning, one of the major objectives before us is to understand the tax code as it pertains to charitable giving and navigate it wisely. Effective tax planning is a long-term strategy, which is why it is important to be intentional about it as early in your career as possible.

Leverage?

A common theme you’ll notice throughout this blog is using leverage to increase the giving impact of each dollar of wealth. The goal here is to increase the charitable planning ROI of our wealth, which we can do through many different ways, but I’ll break this down into more concrete terms with a couple of examples.?

Leveraging the Power of Low-Cost Debt

Low-cost debt can actually be useful in helping to grow your net worth. Every situation is unique, but often paying off low-cost debt early, especially a mortgage, can actually hurt your long-term net worth.?

First, there’s the opportunity cost. Every dollar you put towards your mortgage is one less dollar that could go towards something else.

For example, if you don’t have a sufficient emergency fund and put your money towards paying off your mortgage early instead of building this emergency fund, if an unexpected expense arises you may not be able to make future mortgage payments.

Another opportunity cost is investing in the stock market. While we can’t guarantee future returns, if we expect to see annual returns of around 7 or 8 percent, depending on the interest rate on your mortgage and your investment time horizon, the amount you could earn in investing may be more than you would save by making additional payments on your mortgage.?

Secondly, there’s the time value of money to consider. What I mean by this is that due to inflation, the value of your money decreases, but your mortgage payment remains the same (as long as you have a fixed-rate loan), essentially making your mortgage payment cheaper over time.?

Finally, by paying off your mortgage, you miss out on potential tax breaks, since you could no longer deduct the interest paid on your mortgage from your annual taxable income.?

Leveraging the Power of Tax-Free Compound Growth

I’m a huge fan of Qualified Charitable Distributions (QCDs) from pre-tax (i.e. Traditional and Rollover) Individual Retirement Accounts (IRAs), since they provide a triple tax benefit.

How does that compare to other options?

Traditional and Roth IRA contributions both receive a double tax benefit. For Traditional, you get a tax deduction at the point of contribution, as well as tax-deferred growth over time, but you must pay taxes at the point of distribution. For Roth, you don’t get to deduct your contributions, but you get tax-deferred growth over time, and then you avoid having to pay taxes on the distributions.

With QCDs starting at age 70?, you can make up to $100K per year of charitable donations from your pre-tax retirement savings.?Essentially, what this means is you are taking money that has never been taxed, growing it tax-deferred, then giving that compounded growth to charity, at which point you get another tax-deduction, thereby avoiding taxation on those distributions.?We are now getting to a point of leveraging not just the power of compound growth or even tax-deferred compound growth, but of tax-free compound growth, to super-size your lifetime giving impact.

The Takeaway

To truly maximize your lifetime charitable giving impact, you must take the long view and adopt a charitable planning mindset, which involves laying a solid foundation upon which to build towards your financial legacy over your lifetime. It requires strategic thinking and looking holistically at your financial situation. If you would like some help along the way, feel free to schedule a free consultation with us using the link in the comments.

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1. Charis Legacy Partners is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not by itself imply any level of skill or training. The information presented in this article is general in nature and is not to be construed as advice.?Prior to making any financial planning decisions, you should seek professional advice from a skilled financial planner regarding whether any particular strategy is relevant or appropriate to your individual circumstances; Charis Legacy Partners is happy to partner with you on this journey if you don’t have a financial legacy planner. Lastly, although obtained from reliable sources, Charis Legacy Partners cannot guarantee the accuracy of the information received from third parties. The opinions expressed herein are those of the author and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Past performance is no guarantee of future results. Investing involves the risk of loss and investors should be prepared to bear potential losses.