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Why Give to Charity?

By: Robert Gordon

By: Robert Gordon, MBA, CFP, AIFA

Americans are a generous lot. Official figures for charitable contributions to 501(c)(3) organizations tally just above $300 billion annually. To put that in perspective, if these contributions were instead paid to a country which had no other revenue source, it would be the 39th largest nation in Gross Domestic Product (GDP) terms.1 Individual and family contributions account for more than three quarters of that giving2. You may be one of those individuals. Thanks to creativity and initiative in the nonprofit marketplace, donors have a wider than ever variety of options for creating a legacy.

While giving to religious entities accounts for more than a third of total contributions to 501(c)(3) organizations, the remainder is distributed to a wide variety of secular organizations like the NRA Foundation, the ACLU Foundation and Teach for America. In fact, there are over 1 million organizations that are approved to use the 501(c)(3) designation. What is 501(c)(3)? 501(c) is a provision of the United States Internal Revenue Code, listing 26 types of nonprofit organizations exempt from some federal income taxes.3 Examples of 501(c) organizations include Labor, Agricultural, or Horticultural Organizations which fall under IRC subsection 501(c)(5) and Fraternal Beneficiary Societies, Orders, or Associations which fall under IRC subsection 501(c)(8). By far, the most popular is 501(c)(3) under which more than 1 million organizations in the U.S. today are registered.4 All 501(c)(3) organizations must follow explicit guidelines to receive their tax exemption. Individuals and corporations who follow strict guidelines may receive a reduction in their tax liability by donating to entities that have this designation and are in good standing with the IRS.

People and organizations give their time and financial resources to charities for many reasons. Principal among those reasons are:

  • They derive a feeling of satisfaction from helping others,
  • They have a desire to leave a long-lasting impression on a cause or in a community,
  • They feel a sense of obligation, often instilled through family or circumstances, to “give back”,
  • They have a desire to promote a specific belief, faith or philosophy,
  • Last, but certainly not least, is a motivation to take advantage of tax savings relating to charitable giving.

Of course, no list of reasons can be truly complete. Proper planning can allow donors to exert more or less influence over the direction of an organization. A great example is David Booth’s $300 million gift to the University of Chicago’s business school. Up until the time of this gift, the University of Chicago’s business school was one of the few top business schools in the nation not named for an individual. Mr. Booth is a 1971 alumnus of the graduate business school and leveraged his exposure to efficient market concepts at the school to build one of the world’s largest asset management firms, Dimensional Fund Advisors. A contribution of this size comes with many requirements and you can be certain that there was a significant amount of negotiation that went into this “deal” on both sides. Included in the “deal” was the addition of the name Booth to the official name of the university’s storied business school. Similarly, development departments at universities worldwide are seeking donors to endow professorships, classrooms and scholarships.

Regardless of the reasons, every donor wants to maximize the impact of their donation of time and certainly money. In the past, it has been difficult to measure the impact of giving on the institutions or causes to which the donations were given. Thanks to advances in information management, donors can demand and receive a higher level of accountability from the charities they donate to or to which they contemplate donating. This has forced the charities to become more efficient in their operations. Web-based enterprises such as www.givewell.net and www.charitynavigator.org provide standardized formats for researching nonprofits. There are even web-based services that aggregate and channel donor’s contributions to charitable programs worldwide.6

Comprehensive financial planning which includes charitable giving (typically referred to as ‘planned giving’) offers donors the opportunity to make their implementation of a charitable giving program more effective. Planned giving maximizes tax code exemptions to reduce the after tax cost of charitable contributions to donors and their families. It also allows the receiving institution(s) to plan their operations in a more organized and systematic fashion. In fact, through a carefully-designed planned giving program, donors can make a gift and have the satisfaction of providing support to the target organization or organizations while earning an immediate tax deduction and even lifetime income in some cases. These planned giving programs range from the simple such as naming a charity as a beneficiary of a life insurance policy to the advanced which would include the creation of a private foundation. Planned gifts can provide important resources that create extraordinary opportunities for donors, charities and grant recipients.7

  1. Carefully aligning the donor’s objectives with the needs and purpose of the organization will allow all parties to have a more satisfying philanthropic experience.

1 That is out of 193 nations whose GDPs are measured by the World Factbook published by the Central Intelligence Agency of the United States.

2 http://www.charitablechoices.org/chargive.asp

3 IRS website

4 IRS website

5 http://www.npt.org/philanthropy/philanthropy_stats.asp

6 Rachel Emma Silvermann. “Doing Due Diligence on Your Donations”. Wall Street Journal, September 20, 2007

7 http://www.charitygovernance.com/files/0851031.pdf