How to Make an Effective Charitable Donation - A Six Step Process to Ensure That You Get the Biggest Bang For Your Charitable Buck

Spring 2011 CSANews Issue 78  |  Posted date : May 06, 2011.Back to list

Of all the things we do in life, there are few more satisfying than making a charitable gift. Whether it's for a medical cause that needs funding, an organization doing good work in our community, a drive to help victims of a faraway natural disaster or some other charitable purpose, it feels good to know that our money is helping those in need.

No matter how noble the purpose, however, a charitable gift is still a financial transaction. This means that it deserves to be considered with the same degree of care you'd devote to building an investment portfolio, writing your will, or dealing with any other part of your personal finances.

If you're looking to make a significant donation - say, anything more than a couple of hundred dollars in a single year - it makes sense to do a little planning before you open your wallet.

The Need For Process

Charitable giving be can simple and spontaneous. A canvasser knocks on our door one day, or we see an ad on TV, or we receive a letter in the mail, and we donate a little to the cause. There's nothing wrong with this kind of giving; it's easy, it's quick and it comes from the right place.

But for those looking to be more purposeful with their donations - either while living or through their will - charitable giving can be highly complex. Matching the financial side of giving (crunching the numbers, understanding the tax rules, investigating various giving structures) to the actual meaning of the gift (the change or benefit to the individual, to the family, to the community, or to society at large) isn't always easy.

This is particularly true for those looking to make substantial gifts. Depending on the nature of your gift and the complexity of your personal financial situation, the decision to make a charitable gift can have wide-ranging financial implications. If you choose to make such a donation through your will (as many people do), those implications can extend beyond your life and through to your heirs as well.

The solution to this complexity is to consider charitable giving as a process, a step-by-step method or series of actions which ensures that you consider and resolve a number of issues surrounding charitable giving before you get out your chequebook. While such a process is probably more detailed than necessary for small, spontaneous donations, it will help ensure that those who are looking to make a significant donation get the biggest bang for their charitable buck.

Step 1:

What are you trying to do?

In a lot of ways, charitable giving is the most personal part of personal finance. Unlike other financial topics - investing, tax planning, business succession - charitable giving is often highly individual, highly emotional and highly private. 

There are no right or wrong answers when it comes to making a gift; it all depends on what you want to do. Which is why it makes sense to spend some time trying to understand the purpose of your gift before you make a donation.

So, ask yourself: what are you trying to do with your donation? What effect would you like it to have on people in need, or on the community at large? How exactly are you trying to make the world a better place?

A good way to do that is to take a closer look at some of the causes you care about. Ask yourself why you care about these particular causes, rather than others. What exactly about the cause inspires you or motivates you to give?

Next, ask yourself some more specific questions about how you intend to give: would you prefer to make a difference on a local level? What about a national cause? Or, do you want to participate in a broadly based, international charitable effort?

Finally, consider the degree of involvement you'd like with your gift. Would you prefer to be personally involved with the charity - perhaps by volunteering time as well as money? Or would you prefer your gift to remain anonymous? Would you like to give once, or on a continuing basis?

Step 2:

Articulate your giving values

After you've determined the reason you're making a gift, it's time to articulate your giving values. You can do this by creating a "giving values statement," a short paragraph that covers three main areas:

A core vision: a two- to three-sentence summary of the principles that have led you to give. Use the information you've learned from step one, and write it down: what kind of effect you want your money to have, what kind of change you'd like to make happen, and so on.

An area of giving: a description of the types of causes or charities you'd like to support. At this point, you might have specific charities in mind, or you might only have an idea of some general areas of charitable work in which you want to be involved.

Criteria for selecting individual charities: a brief outline of the criteria you will apply when deciding which organizations to which you'd like to donate. Again, think about the information you learned in step one: whether you desire to make a local or national impact, whether you want to be involved in the charity, etc.

Step 3:

Screen potential charities and causes

Once you have a written statement of giving values, you can start reviewing potential charities to see if they match those values. The goal here is to create a kind of "screen" for potential charities: a checklist of simple-to-answer questions that can help you quickly identify those charities that are in alignment with your charitable values, and those that are not.

The following questions will help you create a "short list" of potential donation recipients:

Purpose: what exactly is the organization trying to do? Is this purpose focused and clear, or vague and undefined? To the best of your ability, try to judge whether that stated purpose is realistic or not; is the organization focused on tangible, concrete action? Or do the goals seem unrealistic and "pie in the sky"?

Method: does the organization have a viable plan for achieving those goals? What are the measurable milestones that will help the organization know whether its efforts have been successful or not? Will the plan produce results within a reasonable time? Or, will it take decades or even generations to achieve results?

Management/Leadership: are board members active in the cause? For how long? Are they passionate about what they're doing? Are they competent professionals with management experience? Can they motivate both staff and donors toward a common goal? Do they have a strong track record when it comes to engaging with the media, bringing attention to the cause and generating additional donations?

Financials: how strong is the organization's balance sheet? How much money did the organization spend on, or distribute to, its chosen cause? How does the organization attract additional donations? What portion of those donations is directed to actual programs, and what portion to administration?

Step 4:

Consider the end use of the gift 

You also need to consider what you want the charity to do with your donation. If you're not concerned with where your money goes, you can provide the organization with "unrestricted funds." These can be particularly effective for organizations with a strong sense of purpose and capable management.

If you're looking to provide more specifically directed support, consider one or more of the following:

Operating expenses: money used to fund rent, utilities, office supplies, etc. While not as exciting as specific charitable programs, these funds remain essential to the smooth and efficient functioning of any charity.

Program support: donated to support or improve an existing charitable service. Increasingly, charities are offering donors the ability to target specific parts of specific programs.

Capital campaigns: used to build new facilities or expand existing ones. A common purpose for larger, community-based charities with the need for extensive infrastructure. A new community youth centre would be a prime example here, or perhaps a new laboratory for a charity doing medical research.

"Leadership gifts": large donations intended to motivate other private and corporate donors to give. This can be an exceptionally attractive use for a high net worth individual with a large personal and professional network. By showing others how a particular cause matters to you personally, you can bring attention to a cause that might have otherwise gone unnoticed, and spark further donations from others.

Step 5:

Select a charitable giving vehicle

If you're thinking about making a charitable gift, you face a variety of options for making that happen. While a full list of all the possible giving vehicles would take a great deal more space than we have here, it's a good idea to familiarize yourself with the pros and cons of some of the more common ones, so you can get a better idea which charitable vehicle is right for you.

Cash: Probably the simplest method of charitable giving is the cash gift: you write a cheque, and the charity provides you with a tax receipt for your donation. The main benefit of cash as a giving vehicle is its flexibility: you can make your gifts when you can afford to do so, and you can give when the charity needs it most.

Volunteering: While volunteering has always been an important part of charitable work, it has gained in popularity during the recent recession, when people have less disposable income to give to their causes. Whether you have several hours per week or a single day a year to give, chances are that you can find a charity in your community that can use your help.

Giving circle: A giving circle works in much the same way as an investment club: a group of individuals pool their money and donate to a cause which they share in common. In this way, members of the circle hope to "amplify" the power of their donation and make a more significant impact on their chosen cause than they could normally do alone. Many giving circles share a social component in which members get together on a semi-regular basis to build community, as well as to review their charitable activity.

Gifts in kind: The official name for gifts of stock, mutual funds, real estate and collectibles (art, antiques and other items of cultural value). The tax credit you receive is based on the property's fair market value. A good option, particularly with gifts of securities which, in most jurisdictions, receive preferential tax treatment when they're donated to a registered charity. Keep in mind, however that, over the past several years, tax authorities have cracked down on "donate low; claim high" scams that use inflated statements of a gift's fair market value to claim an outsized tax credit.

Donor-advised funds: Donor-advised funds are charitable accounts administered by a sponsoring organization on behalf of an individual or group. Although donor-advised funds can differ according to the company administering them, their general structure is fairly similar: a donor contributes money to the fund, which is then managed and invested by a third party. The donor then advises the administrator regarding when and to whom to give the money. In this way, donor-advised funds can be a simpler and less-expensive alternative to a private foundation (see below).

Microphilanthropy: As the name suggests, microphilanthropy is charity on an extremely modest scale (most donations are less than $50), often facilitated via online websites. It is often a more personal form of philanthropy, connecting donors to individuals "on the ground" and making change within a particular community. Sites such as www.socialactions.com serve as a microphilanthropy aggregator, compiling information from more than 60 microphilanthropy sites and allowing users to search for particular causes in need of donations. 

Charitable remainder trust (CRT): A CRT is an ideal method for giving hard assets or property, or any gift that has a built-in income stream (a bond portfolio, for example). With this giving method, you pass property intended for a charity to a special trust. You receive an immediate tax receipt for the property, but retain the right to use and derive benefits (i.e. income) from the property as long as you are alive. Upon your death, ownership of the property passes directly to the charity, which may use or dispose of the property as it sees fit. 

Private foundation: Perhaps the most complex method of charitable giving, and one that is best suited for wealthy individuals looking to make a substantial donation. While there is no minimum on the amount of money that could be placed in a private foundation, the administration and legal costs make it prohibitive for gifts of less than $1 million. 

The exact structure of a private foundation can vary but, in the most basic scenario, the donor establishes a private non-profit organization and assigns assets to that organization in exchange for a tax receipt. The donor appoints a trustee to oversee assets and a board of directors to oversee a series of ongoing grants (the donor often, though not always, functions as the chair of that board). As long as the foundation continues to follow the appropriate government rules (for example, most jurisdictions require foundations to give a minimum percentage of their assets every year to charity), assets can compound within the foundation free of tax. 

What this means is that private foundations can be an excellent way in which to establish a long-lasting charitable legacy. Because of this tax-free compounding ability, foundation assets could theoretically grow far beyond the size of the original gift and last for years after the founder has passed away. However, establishing a foundation does require a significant commitment of both time and money, as well as specialized legal and financial advice. 

Step 6:

Consult with a professional

Finally, before you commit your money to a cause, make sure to review your decision thoroughly with a financial professional, preferably one with a good deal of experience structuring charitable gifts. 

Many banks and investment firms offer specialized financial and tax advice for those looking to make a substantial charitable gift. Reviewing your giving options in advance will not only help clarify your personal wishes, it will ensure that your gift matches your giving personality.

Above all, remember that a charitable gift is still a financial decision. While the motivation for giving is a noble one, the practical consequences of giving your money away demands that you consider your options before you take action. This way, you can be sure that you're making a decision which is right for you -and for the cause about which you care.