I remember when I was a kid and learned that the universe was expanding and therefore had no edges. I could not wrap my arms around the unanswerable question of what was beyond the universe.
Our clients often ask us an unanswerable question: How much should we be giving to charity? So I'll start with the unanswerable and move to two more easily addressed charitable questions: To whom should we give and how should we do it?
How much you give to charity ultimately comes down to motives. There are basically five overlapping reasons why we give our hard-earned money to others. Four of them sound a bit crass, but don't judge them, just explore them.
We may give because we feel guilty about what we have. I see this most often with clients who are conflicted about money and don't want it to be as important to them as it appears to be. The problem with giving out of guilt is you can't completely ignore those feelings, and can never give enough to assuage them. Instead, be more intentional with your purchases as well as your giving to fully appreciate your money choices.
We may give out of obligation. A friend is involved with a charity and asks us to support it. A quid pro quo results and we expect them to support our cause. Think of this inevitable reciprocity when you engage others with your causes.
We may give to build our legacy. But a legacy is often how others remember you based on who they are, not on who you are. Your actions will create a memory, and giving is just one of the many actions you take in your lifetime.
We may give for positional reasons. Giving can get us invited to things and seemingly improve our status. In this situation, giving is transactional, but it certainly may give us what we think we want.
The last reason we give is because we want to have an impact and feel a responsibility to not only provide our time and talents to causes, but also some of our treasure. Giving is aligned with our values and makes us feel like we are meaningfully contributing.
Regardless of your reasons for giving, you can consider giving a set dollar amount, a percentage of your assets, or a percentage of your income. Start intentionally, though, because once you start giving, you tend to continue to do so.
Determining to whom we should give when we want congruence between our giving and our values starts with a charitable mission statement. Through this, you identify your values, determine which categories best fit those values, and look for charities that fit a criteria you establish. Generally, you want to create a broader construct first, and then narrow it.
You could start with the environment and then see if there are particular areas such as conservation or water or habitat that resonate more with you. The value of this kind of mission statement is that it helps you define where you want your money to go. It also defines what causes may be important to you but not ones for which you wish to give financial support. When you are approached about giving, you can use your mission statement as a way to say yes or no.
A great way to give to charity is when you are 70 1/2 and use your retirement plan to make qualified charitable distributions (QCD). This is ideal for two reasons: First, the deduction never shows up on your tax return so you are not limited by whether you itemize deductions. Second, you can reduce the amount of your required minimum distributions that you have to take from your IRA starting at age 72 by these QCDs.
Another option is to give appreciated stock that you have held for 12 months. By giving stock that has gone up in value, you avoid paying the capital gains taxes you would owe if you sold the stock first, but your gift is still the total stock value. The easiest way to do this is through a donor advised fund (DAF) through a community foundation or brokerage firm. Your deduction occurs when you gift the stock, not when you direct the DAF to give it to your choice of charity. Qualified Charitable Distributions cannot be made into a donor advised fund.
We like to have clients bunch two or three years worth of charitable gifts into a donor advised fund to increase the likelihood of them receiving a tax deduction for the gift.
The needs of the world are expanding like the universe, but avoid making your charitable giving a black hole by developing an appropriate strategy.