Charitable giving is personally fulfilling while also having certain financial benefits. Through charitable giving you can help others, impact your community, and encourage gratitude and generosity among your descendants. The financial benefits of charitable giving include annual income tax planning and federal and state estate taxes planning.

Some of the most common vehicles for significant charitable giving include donor-advised funds, private foundations, and charitable trusts.

1. Donor-advised funds

A donor-advised fund, or DAF, is a fund created to support charitable organizations. With a DAF, you make an irrevocable contribution to the fund and your donation is eligible for an immediate tax deduction. Typically, you can donate cash, stocks, bonds, ETFs, mutual funds, and in many cases, non-publicly traded assets such as real estate, private business interests, and private company stock to a DAF. Once your DAF has been funded, you, or others you designate, can act as the advisors of the fund and recommend grants/donations over time to any IRS-qualified public charity.

2. Private foundations

A private foundation is a charitable organization typically established by an individual or family with a substantial initial gift. A board of directors oversees the private foundation and is responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations.

With a private foundation, you can establish a legacy beyond your lifetime and allow family members to be employed or serve as directors. A private foundation can support charitable programs undertaken by individuals, scholarship programs, and other entities, as well as 501(c)(3) charities.

There are a few downsides to private foundations. First, private foundations are administratively more complex than other charitable vehicles. They require legal setup and ongoing maintenance, including annual filings and other reporting. Second, charitable deductions to private foundations are limited to 30% of AGI for cash and 20% of AGI for long-term publicly traded securities. Non-publicly traded assets, such as privately held stock or real estate, may only be deductible at your cost basis rather than fair market value (FMV) when gifted to a private charity like a private foundation.

3. Charitable Remainder Trusts

A charitable remainder trust (CRT) is an irrevocable trust that allows you to “split” a trust’s assets between charitable and non-charitable beneficiaries, thereby helping with retirement, estate planning and tax management goals.

A CRT generates a potential income stream for you and/or other beneficiaries during your lifetime or for a specific term. After the beneficiaries pass away, or at the end of the specified term, the remainder of the donated assets passes to one or more charities that you named in the trust.

There are 2 types of charitable remainder trusts (CRTs): charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). A CRAT distributes a fixed annuity amount each year, and additional contributions are not allowed. A CRUT distributes a fixed percentage based on the balance of the trust assets (revalued annually), and additional contributions can be made.

Both trust types are treated as an irrevocable transfer of cash or property and are required to distribute a portion of income or principal to the beneficiaries. Investment income to the trust is exempt from tax, but distributions to the beneficiaries may be taxable and are subject to special tax rules.

At the end of the specified term or the death of the last income beneficiary, the remaining trust assets are distributed to a charitable remainder beneficiary. The annual annuity must be at least 5% but no more than 50% of the trust’s assets. A trust’s term may be fixed for a period up to 20 years, or it can be for the life of one or more non-charitable beneficiaries.

4. Charitable Lead Trusts

A charitable lead trust (CLT) is an irrevocable trust that generates a potential income stream for the named charitable beneficiary, with the remaining assets eventually going to non-charitable beneficiaries. CLTs are not tax-exempt, and the tax treatment of the trust can vary, depending on how you set it up.

Through a non-grantor lead trust, the trust’s annual income is not taxable to the grantor (the person who funded the trust). In this case, you cannot take an income tax deduction for creating the trust. The trust pays tax on the income and claims a charitable deduction for the amount it pays to the charitable beneficiary each year.

Through a grantor lead trust, the grantor can take an immediate charitable contribution deduction for the present value of the future income stream to the lead charitable beneficiary, subject to applicable percentage limitations. These amounts depend on whether a public charity or a private foundation is the beneficiary. However, this benefit is offset by the fact that the trust income is taxable to the grantor during the term.

Both types of CLTs allow you to choose the term of the trust and the amount distributed, at least annually, to charity. Assets used to fund a charitable trust are removed from your estate and may not only reduce the amount of tax your estate has to pay upon your death but may also preserve funds for your heirs.

CLTs may be a good fit if you want to pass property to heirs and reduce gift and estate taxes.